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The issue of correlation is critical to the level of diversification in a portfolio. There...

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The issue of correlation is critical to the level of diversification in a portfolio. There is a saying in the investing community that "correlation between assets increases during periods when diversification is most needed". What does the statement mean and how does this impact an investor? How can an investor overcome this using traditional asset classes? 1. Explain what is correlation and its role in a portfolio? Discuss why assets within a similar asset classes (only traditional asset classes) have high correlation with each other, while assets across asset classes will have low correlation with each other? 2. Why does correlation change during periods of sharp market decreases? [Discuss the academic literature on this as well) 3. Explain which asset class is relevant for discussion here? Both equities and Bonds? 4. Based on your answer in part 3, explain how investors can overcome this lack of diversification

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