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Geopolitical Risk Increases Market Correlation
Diversification benefits shrink as multiple asset classes react simultaneously to global shocks.
Normally, different asset classes move independently, but extreme geopolitical risk can cause market correlations to approach 1.0, where everything falls at once. This "contagion effect" makes traditional diversification less effective during the initial shock of a conflict. In 2026, sophisticated investors use tail-risk hedging and inverse ETFs to protect their portfolios when standard asset allocation fails to provide a buffer against synchronized global sell-offs.