Investors spend an inordinate amount of time and effort seeking investments that offset, or otherwise “hedge” risky assets, yet modern portfolio theory has proven this is a suboptimal approach that provides only a small portion (less than 10 percent) of diversification's benefits, according to a report by Bluerock.
The analysis uses modern portfolio theory to deconstruct the three elements of diversification to quantify the benefits of each of the segments and indicate how to apply them to building a more efficient portfolio. In the report, BlueRock reviews and explains the three main sources of diversification’s benefits, which are:
Buffering effect: benefits of low volatility
Decorrelation effect: benefits of low correlation
Hedging effect: benefits of negative correlation
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