It is common practice for investors and consultants to establish return, volatility and covariance assumptions for all their asset classes, and to use these to produce a raft of portfolio return and risk statistics. A key assumption underpinning this kind of analysis is that portfolios can be rebalanced to target, even after large market drawdowns. One of the key benefits of diversification comes from the idea that we can rebalance from assets that have performed well into those that have not, and then reap the benefits as they mean revert to their long-run returns. However, that assumption is out the window if no one’s buying. Read the full summary below.
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