Correlation's Importance to the Long-Term Investor is Overrated

Abstract

Has the recent rise in the correlation between domestic and foreign equity returns been accompanied by a reduced difference between their returns? For many divisions of the broad equity asset class, the levels of pairwise correlations say very little about the return differences that investors experienced over recent history. When risk to an investor is the regret that derives from the possibility of holding only the poorer performing of domestic and foreign equity, there is little evidence that increases in correlation reduce the benefits of diversification.