But note that this analysis simply uses costs of transactions. In the use of asset allocation, one attempts to use investments that, hopefully, will do well, but are independent, at least to some degree, from each other. From 1985 to 1990, the correlation between international bonds and the U.S. Bond was 0.28- fairly low. Further, as more analysts analyze foreign investments, fewer inconsistencies and opportunities are noted and therefore much of the uneven playing field is lost. Part of the reasons for doing so involve correlation.
Correlation essentially represents how much a stock or fund is like another fund.
If they move the same amount for the same reason at the same time, they are said to have a correlation of 1.0. The lower the correlation when compared to each other, the better. Previous articles in many major magazines indicated that foreign issues were becoming more and more correlated with the U.S. market and therefore you weren't really getting the diversification you needed. However, it was becoming less correlated with the countries of Argentina, Brazil, Mexico, France, Singapore, South Korea and Japan. They indicated one of the major reason of high correlation was how closely the countries monetary policies are tied together.