the interest of emerging market

Another reason is that it is in the interest of emerging market
countries to keep their currencies relatively stable compared to
the dollar, because that means their exports to the United States
remain competitively priced. If these emerging market currencies
rise sharply in value, the exports sold in the United States will become
more expensive, cutting into sales abroad and economic
growth back home.

For this demonstration (see Table 2.1)

For this demonstration (see Table 2.1) we used a portfolio of
55 percent stocks (from the S&P 500); 30 percent bonds (using
the Lehman Aggregate bond index); 10 percent commodities (using
the Goldman Sachs Commodity Index or GSCI Total Return,
which includes crude oil, natural gas, copper, gold, wheat, coffee,
live cattle, and lean hogs among its commodities); and 5 percent
cash (using a 30-day Treasury bill).

United States compared strong correlation

A one (1) means a strong correlation in the same direction,
while a minus one (–1) means a strong correlation in the opposite
direction. A zero (0) means no correlation. In the analysis here we
are being conservative, using five-year, or 60-month, rolling correlations.
This means that each monthly correlation reading includes
five years of returns from the United States compared to
five years of monthly returns of a foreign market or markets. This
smooths out a lot of the noise

S&P 500 In 2003

The result of diversification is not always a smaller loss. It can
be a smaller gain. In 2003, the year the stock market began its recovery
from the 2000 crash, the S&P 500 had a total return of
28.7 percent while the return for the Russell 2000 was a stunning
47.3 percent. The combined return was 38 percent.

Lack of correlation

In statistical terms, you are looking for a lack of correlation
in picking the investments in your portfolio. Among your stocks,
you look for equity groups or sectors that tend to move in different
directions—for example, by buying both the blue chips in the
Standard & Poor’s 500 stock index and the often unheard-of
smaller-cap stocks that are in the Russell 2000 Index.

S&P 500 down 9.1 percent

In 2000, both indexes had a decline in total return, with the
S&P 500 down 9.1 percent while the Russell 2000 was off just 3
percent. They did not move in opposite directions, but that is often
what a low correlation actually is: not a rise versus a fall, but a
much smaller rise or a much smaller decline. These different paces
in the same direction change the risk of your portfolio. That is, it
is better to have half your portfolio falling 3 percent while the rest
is dropping 9.1 percent, which translates into a decline in return
of 6.1 percent, instead of all of it plunging 9.1 percent. You might
retort that if all the portfolio were in the Russell 2000, it would
have fallen just 3 percent.

Rise substantially

In this case, the quantity supplied is the same regardless
of the price. As the elasticity rises, the supply curve gets flatter, which
shows that the quantity supplied responds more to changes in the price. At the opposite
extreme, supply is perfectly elastic. This occurs as the price elasticity of supply
approaches infinity and the supply curve becomes horizontal, meaning that
very small changes in the price lead to very large changes in the quantity supplied.
In some markets, the elasticity of supply is not constant but varies over the
supply curve. Figure 5-7 shows a typical case for an industry in which firms have
factories with a limited capacity for production. For low levels of quantity supplied,
the elasticity of supply is high, indicating that firms respond substantially to
changes in the price. In this region, firms have capacity for production that is not
being used, such as plants and equipment sitting idle for all or part of the day.
Small increases in price make it profitable for firms to begin using this idle capacity.
As the quantity supplied rises, firms begin to reach capacity. Once capacity is
fully used, increasing production further requires the construction of new plants.
To induce firms to incur this extra expense, the price must rise substantially, so
supply becomes less elastic.