Both U.S. and foreign stocks,

They concluded that such forecasting will be difficult. “Because of the infrequency and randomness of extreme market events, this prediction
is difficult to make with precision,” they wrote.4
The authors themselves chose two different responses.
Joaquin cut the global portion of his portfolio, which included
both U.S. and foreign stocks, to 20 percent from 40 percent.
“Foreign equities are not as reliable a cushion during market
downturns as I originally assumed [before the study],” Joaquin
said in an interview by e-mail. “And I can still take advantage of
profit opportunities in foreign markets indirectly by investing in
U.S. firms with substantial operations in other countries.

Correlation level of emerging markets

2006, it is still one of the
reasons that the overall correlation level of emerging markets has
been over 0.7 since September of 2002.
These higher levels of correlation mean that reducing the
overall risk in your portfolio is more difficult. And that is just
when stock markets are in their normal up and down cycles.
Making this rise in correlations more of a problem is the fact
that when there is a big sell-off in markets, especially one led
by the United States, stock markets around the world are even
more inclined to move in the same direction, which, unfortunately,
is down.

Ten developed stock markets

Ten developed stock markets, including Germany, Italy,
France, and Switzerland, registered their highest correlation levels
with the American stock market in 2006. And four others, Australia,
Denmark, Norway, and Sweden, reached their highest correlation
levels ever in the last eight months of 2005.
This rise in correlations may not be so surprising

Stocks trading in so called developed

For stocks trading in so-called developed markets abroad, the
average correlation has been 0.562 since December 1974, the beginning
of the first five-year period of rolling monthly correlations
using return data from MSCI for the United States and
stock markets abroad. In the period through December 2006, the
lowest correlation was 0.261 in April 1997. The highest correlation
was 0.869 in April 2005.

Globalization increases.

“The more that people invest overseas, the more common
ownership there is, the more there will be common responses to
events that move markets,” he said, referring to the 2006 summer
slump of global markets. “That is a fact of life and this correlation
is going to increase as globalization increases.”
It just takes a zero and a one to explain that correlations of
stock markets around the world are rising.

What benefit does from buying the Elvis Presley album

What benefit does John receive from buying the Elvis Presley album? In a
sense, John has found a real bargain: He is willing to pay $100 for the album but
pays only $80 for it. We say that John receives consumer surplus of $20. Consumer
surplus is the amount a buyer is willing to pay for a good minus the amount the
buyer actually pays for it.
Consumer surplus measures the benefit to buyers of participating in a market.
In this example, John receives a $20 benefit from participating in the auction because
he pays only $80 for a good he values at $100. Paul, George, and Ringo get
no consumer surplus from participating in the auction, because they left without
the album and without paying anything.

The price rises quickly

To sell your album, you begin the bidding at a low price, say $10. Because all
four buyers are willing to pay much more, the price rises quickly. The bidding
stops when John bids $80 (or slightly more). At this point, Paul, George, and Ringo
have dropped out of the bidding, because they are unwilling to bid any more than
$80. John pays you $80 and gets the album. Note that the album has gone to the
buyer who values the album most highly.