This note looks at the lessons for investors in managing risk and diversification flowing from the global financial crisis. The key points are as follows:

– The global financial crisis highlight that quantitative measures of the riskiness of assets and the correlations between them are highly unstable.

– There is certainly a role for alternative and more exotic investments in portfolios. But their diversification benefits should not be exaggerated. Quantitative estimates of risk and diversification need to be combined with qualitative assessments and there is no real substitute for government bonds as a defensive asset class.

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