Singer-Terhaar market segmentation q expected, familiar, partially

random_walker47

Greetings boys and girls. lovely friday night in nyc, eerily familiar feeling of being UTTERLY LEFT OUT of all living things in the universe… sigh.
here is my question.
under Singer-Terhaar, for segmented markets, we assume the correlation of a market w. the GIM = 1. why is that? shouldn’t it be zero???
To figure out the E(Rm) for a partially integrated market A, we take a weighted average of the expected returns under full integration v. full segmentation, as follows:
1) 100% integrated: using the correlation of market A w. GIM s.t. E(RP) = correlation factor x st dev of market A x GIM Sharpe and
2) 100% segmented: using assumed correlation factor of 1 = st dev market A x GIM Sharpe
but that doesn’t make sense! if the market is fully segmented, shouldn’t its correlation w. GIM Sharpe be zero, not 1?
can anyone please explain?

Londonrocks

bump
Anyone else having problem with understanding their approach?

Chuckrox8

then its settled. they are NOT the same portfolio. Thanks.

ruchita

Footnote on page 45. “For simplicity, we are assuming that the Sharpe ratios of the GIM and the local market portfolio are the same”

FVPV

It makes sense that we use the same Sharpe for the GIM, since it is one global market. This piece from the CFAI curriculum might help:
(equation 10 is: RPasset = SD of asset x correlation of asset and world market x sharpe ratio of world market)
pg 43, Volume 3
“Equation 10 requires a market Sharpe ratio estimate. Singer and Terhaar (1997, pp. 44–52) describe a complete analysis for estimating it. As of the date of their analysis, 1997, they recommended a value of 0.30 (a 0.30 percent return per 1 percent of compensated risk). Goodall, Manzini, and Rose (1999, pp. 4–10) revisited this issue on the basis of different macro models and recom- mended a value of 0.28. For this exposition, we adopt a value of 0.28. In fact, the Sharpe ratio of the global market could change over time with changing global economic fundamentals.
(Level III Volume 3 Capital Market Expectations, Market Valuation, and Asset Allocation, 4th Edition. Pearson Learning Solutions p. 44). “

Roflnadal

Mark
Both the Schweser and CFAI treatment are the same: the same GIM Sharpe is used for both integrated and segmented calculations.
I guess I too will just accept this and move on, but one WOULD think that a “perfectly” segmented portfolio would have a correlation of 1 ONLY to the local segmented market, and NOT to the GIM Sharpe.

Halawiz

GIM, as its name suggests, is the global market. Hence, whether your particular market is segmented or integrated should not make a big difference in the GIM Sharpe Ratio, I think. This especially hold if the market in question is an emerging market. I think this is why they did not mention that issue.

Dapper425

Zoya, I did notice this when I reviewed the Schweser and almost mentioned it last night but I was tired and wanted to just move on. It is the only piece of the puzzle that doesn’t add up, and I wasn’t sure if the error was particular to Schweser but you mention it is in the curriculum the same way (same sharpe for both) above, right?
Unfortunately I think we are just going to have to think inside of the box the CFAI wants us to think inside of, for these problems. As a matter of logic, I agree that it makes no sense to imply the sharpe ratio is the same (which implies the global portfolio is the same, or its an awful big coincidence that the local and global are the same sharpe).

sabre

I would assume that this is a simplifying assumption made by the CFAI. Lot of information to cover.

ba736

I, too, like the explanation that when dealing with segmented market, we have correlation of 1 because we’re measuring against local market.
Problem with this is that in all the questions i’ve seen we are only given one GIM Sharpe, and we use the same GIM Sharpe in BOTH of the components that we weight
when we take a weighted average of the expected returns under full integration v. full segmentation
see, the Schweser example on page 93 in SS6
and yes, would be happy to work on the zoya-jbaphna update!