Webinar Replay: Portfolio Implications of a Positive Stock-Bond Correlation World
What does a positive correlation between stocks and bonds mean for the future of portfolio construction?
For the last 20y, the correlation between stock and bond returns has been negative, enabling CIOs to increase stock allocations, with bonds acting as a hedge, while still satisfying a given risk budget. However, stock-bond correlation is not immutable. The correlation was persistently positive from the late-1960s until the late-1990s, after having been negative in the 15y before that (Figure 1). A shift to positive stock-bond correlation affects the tradeoff between portfolio expected return and risk, likely altering a CIO’s asset allocation decision. What could lead to such a shift in stock-bond correlation?
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What does a positive correlation between stocks and bonds mean for the future of portfolio construction?
While simultaneous large declines in stock and bond prices are likely temporary, a positive stock-bond correlation regime may persist.
Even in a positive stock-bond correlation world, diversified portfolios still have a critical role to play.