I have attached an image of the question from the CFAI website.
I have a very strong doubt:-
Why the statement “Emerging market equities should not be considered a separate asset class from global equities.” —– is incorrect????????
I STRONGLY BELIEVE THAT THE ABOVE STATEMENT IS CORRECT AND ANSWER SHOULD BE OPTION A: the overlap of sources of risk.
Justification for my belief:-
One of the criteria of specifying Asset Classes is:-
Asset classes should be mutually exclusive or asset classes should not be overlapping. The two asset classes the “Global Equities” and “Emerging Market Equities” are overlapping. So the option A is correct in mentioning that “Emerging market equities should not be considered a separate asset class from global equities.”
Moreover, I will quote an example from the core readings, on page 23; section: Approaches to Asset Allocation; Chapter: Overview of Asset Allocation.
The last sentence on page 23 says and I quote-
” For example, if one asset class for a US investor is domestic common equities, then world equities ex-US is more appropriate as another asset class rather than global equities, which would include US equities. “
Sir, can you please help me find the gap in my understanding.
There seems to be a conceptual mistake in this question as you rightly pointed out that 2 different asset classes can not be homogenous. Here global will include emerging equities. Instead two asset classes should be emerging equity and developed market equity.