Justification for Increasing Emerging Market Allocation

Hard Asset Allocation Global Asset Allocation

ABC Investment Management is evaluating its global asset allocation strategy for the upcoming fiscal year. The firm utilizes a multi-factor investment approach that incorporates macroeconomic indicators, geopolitical risks, and sector performance across different regions. Recently, they identified a diversification opportunity due to the undervaluation of emerging market equities, which have shown resilience despite global economic fluctuations.

In assessing the appropriate global asset allocation, the firm must decide on the optimal equity exposure across developed and emerging markets, considering both the risk-return profile and correlations between asset classes.

Which of the following statements best supports the decision to increase allocation to emerging market equities as part of a diversified global portfolio?

Emerging markets generally exhibit lower volatility compared to developed markets due to less responsive market behavior to global events.

Emerging market equities tend to have higher expected returns and positive growth outlooks driven by favorable demographic trends and ongoing economic reforms.

Investing in emerging markets can lead to lower overall portfolio returns while increasing unsystematic risk due to country-specific factors.

Hint

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