[MUSIC] Good morning, I'm Ines. And today we're going to talk about expanding the asset universe. How you could gain by diversifying globally. With Tony you saw that if two stocks are not perfectly correlated, if their correlation is less than one, you can reduce the risk of your portfolio by combining these two stocks. Today we will look at the correlation between some stock market indices. So, here on this table, you can see pairwise correlation between development markets and emerging markets. The blue ones are correlations between developing markets. And the red ones are correlations where one of the market, at least, is an emerging market. Okay, focus on the last row. This shows us the correlation between US and the other markets. If you look at the correlation in blue, so the correlation between the US and the developing markets, the numbers are quite high. Canada, Germany, UK and US are quite highly integrated. Their business cycles are pretty much well synchronized. There's a lot of common factors that drive the returns of these stock indices. And that would kind of explain this high correlation between these markets. But if you look hard, the correlation between emerging markets and the US, for example, China and US, this is pretty low at 0.2. Same thing with India. India and US correlation is about 0.3. So the emerging markets are quite actually misunderstood. They have high volatility and investors think, okay, wow, I should avoid these markets because of their high volatility. But actually, they have low correlation with developing markets. So if you combine these markets with other developing markets, you enjoy this low correlation. Let's try to do it together. Here we have average returns and volatilities of these eight markets. Six developing markets and two emerging markets. We computed this average return and volatility over the period from 91 to 2013, around 23 years. And we constructed this efficient frontier the same way you saw it with Tony. So we are combining these stock indices in such a way we minimize the variance for a given level of expected return, or equivalency, we maximize the expected return for our level of risk. And this is what gives us this blue curve, this efficient frontier of risky stocks. So let's take an example. If you're a German investor and decided to stay home and invest in the German index, you would have assumed a risk of about 20% and an average return over this period of 10%. But you could have done much better by combining Germany with the other markets. For the same level of risk you could have more than double your average return. How do you see that? Just take the vertical line that goes through Germany and it crosses the blue line, and that point has actually the average return of more than 20%. And that's the point that corresponds to the optimal combination of all of these eight markets. Now, let's take a quiz. Tell me what would be the risk of a well diversified portfolio that gives you an average return of 15%. That's what you could have achieved by holding the Indian market. But look at the volatility of the Indian market and tell me how you could do better by holding the Indian market as part of a well diversified portfolio. Well, you might have got it right, all you need to do is just take the horizontal line that goes through India and crosses the blue curve, our efficient frontier. And you'll see that at 15% all of the risk that you need to assume is about 15%. Not more than 35% that you would have to assumed by investing only in the Indian market. So, the bottom line is that you’re much better off diversifying into global assets and not only investing at home. [MUSIC]