All stocks are correlated to one-another. In times of crisis, these correlations explode higher. The same is true for country indices. For example, if you look at the rolling 5-year monthly return correlations between the MSCI INDIA index and other country indices, Jordan is the least correlated and Hong Kong is the most correlated.
Least Correlated:
Most Correlated:
The annual return charts show the zig/zag nature of these markets:
So, does it make sense to construct a 50/50 portfolio between INDIA and JORDAN? In theory, the resulting portfolio should have lower draw-downs and lesser volatility than either taken alone.
In contrast, here is the 50/50 INDIA/HONG KONG portfolio:
A take-away from this is that diversification within the same asset class (in this case equities,) does not help with drawdowns. Nor does it necessarily lead to higher returns. It is way of protecting yourself from mistakes that are only apparent in hindsight. Just ask investors who were invested 100% in Jordan the last decade.
Code and charts on github.
Related: Stock and Bond Correlations and Volatility