Impact of Increased Correlation on Global Asset Allocation

Alice is the chief investment officer at a global investment firm managing a diversified portfolio of assets across various regions. Recently, she conducted a global asset allocation review and found that the correlation between equity markets in developed countries and emerging markets increased significantly over the past year. As such, she is considering how this change in correlation might affect their approach to asset allocation.

Alice is especially concerned about how this increased correlation will impact the risk-return profile of the portfolio, particularly regarding the strategic asset allocation across different geographies. She knows that typically, lower correlations among asset classes can help reduce portfolio risk, but she is unsure about the implications of this recent market behavior.

As the firm's investment committee prepares for the next quarterly meeting, they seek to understand the best course of action in response to these findings.