Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
"A full portfolio correlation matrix is a square matrix that displays the correlation coefficients between every pair of assets within a portfolio, with values ranging from -1 to +1. Each cell in the matrix represents the correlation between two assets, where a value of 1 indicates perfect positive correlation (assets move in the same direction), -1 indicates perfect negative correlation (assets move in opposite directions), and 0 indicates no correlation. The diagonal elements of the matrix are always 1, as each asset is perfectly correlated with itself. This matrix is derived from the covariance matrix by standardizing the covariances using the standard deviations of the respective assets. It is a key tool for assessing diversification benefits, as lower correlations between assets generally lead to reduced portfolio risk. The matrix can be used to calculate portfolio variance and standard deviation, which are essential for risk assessment in modern portfolio theory. For a portfolio with multiple assets, the full correlation matrix allows investors to understand the co-movement of all assets simultaneously, helping to identify potential diversification opportunities or risks".
Never heard of it before. Do play with correlations in setting up what is hoped to be a balanced portfolio. Following a wide range of assets over many years is a good way to get a sense of correlations. Doesn't always work. ISTM equities and bonds are thought to be negatively correlated. In '22 that wasn't the case. When an asset enters bubble territory (extreme overvaluation) trying to achieve balance by using correlations may be of little use. Suspect the opposite is also true of broken-bubble (steeply undervalued) assets. I've heard it said that gold is inversely correlated to most other assets. Dunno about that. ISTM it runs in immense cycles lasting 3-5 years on both the upside and downside. Can double or halve in value over a couple years time. Wouldn't suffice for my bomb shelter.
Can it be said cash is the ultimate non-correlated asset?
Portfolio Visualizer (PV) and Test Fol provide correlation matrix for holdings. It may be useful to glance at them and look for unusual values. One can also check if the portfolio is diversified - it isn't if all correlations are 0.95+.
For portfolio construction, other MPT stats such as SD, beta, Sharpe Ratios, may be more useful.
composite stats seem useful after using a correlation to test specific add\sell. time periods are critical input, as correlation1 in a real crisis. anyway, these are all crutches for risk via proxies like volatility. (thx for nothing howard marks!) imprecise but possibly longterm directional aids.
Comments
From Bing's AI:
"A full portfolio correlation matrix is a square matrix that displays the correlation coefficients between every pair of assets within a portfolio, with values ranging from -1 to +1. Each cell in the matrix represents the correlation between two assets, where a value of 1 indicates perfect positive correlation (assets move in the same direction), -1 indicates perfect negative correlation (assets move in opposite directions), and 0 indicates no correlation. The diagonal elements of the matrix are always 1, as each asset is perfectly correlated with itself. This matrix is derived from the covariance matrix by standardizing the covariances using the standard deviations of the respective assets. It is a key tool for assessing diversification benefits, as lower correlations between assets generally lead to reduced portfolio risk. The matrix can be used to calculate portfolio variance and standard deviation, which are essential for risk assessment in modern portfolio theory. For a portfolio with multiple assets, the full correlation matrix allows investors to understand the co-movement of all assets simultaneously, helping to identify potential diversification opportunities or risks".
Never heard of it before. Do play with correlations in setting up what is hoped to be a balanced portfolio. Following a wide range of assets over many years is a good way to get a sense of correlations. Doesn't always work. ISTM equities and bonds are thought to be negatively correlated. In '22 that wasn't the case. When an asset enters bubble territory (extreme overvaluation) trying to achieve balance by using correlations may be of little use. Suspect the opposite is also true of broken-bubble (steeply undervalued) assets. I've heard it said that gold is inversely correlated to most other assets. Dunno about that. ISTM it runs in immense cycles lasting 3-5 years on both the upside and downside. Can double or halve in value over a couple years time. Wouldn't suffice for my bomb shelter.
Can it be said cash is the ultimate non-correlated asset?
For portfolio construction, other MPT stats such as SD, beta, Sharpe Ratios, may be more useful.
composite stats seem useful after using a correlation to test specific add\sell.
time periods are critical input, as correlation
anyway, these are all crutches for risk via proxies like volatility. (thx for nothing howard marks!)
imprecise but possibly longterm directional aids.