"Asset correlations" refers to the relationship between different assets, specifically how they tend to move in relation to each other. It helps investors understand if two or more assets have similar fluctuations or if they move in opposite directions.
Full definition
The financial concept
of asset correlation is important because the goal of asset allocation is to combine assets with low correlation.
The money market in your investment account serves the purpose of lowering
portfolio asset correlation and can be used to buy risk assets when opportunities arise.
I think the recent recession as shown us all that there is a very
high asset correlation in many different markets.
If the markets come up with another one, like
risky asset correlations, it will have validity, restraining speculative behavior, until people overwhelm it, and a new bust happens.
In the real world most assets have some correlation; so a low
asset correlation such as between gold and S&P stocks, would be a good example of near non-correlated assets.
Increasing lifespans, expensive bonds and stocks, and
increased asset correlation should cause investors to be skeptical of this rule of thumb.
This online tool uses mean - variance optimization to generate forward - looking efficient frontiers based on user - specified expected annual return and volatility of assets combined with
historical asset correlations.
Because of
the asset correlations, the total portfolio risk, or standard deviation, is lower than what would be calculated by a weighted sum.
An asset correlation matrix for the four funds listed in Jackass Investing along with LSC and WDTI is below.
To obtain consistent information on recent correlation changes across all the above stock types, I examined 19 index ETFs using
the Asset Correlation tool in Portfolio Visualizer.
For consistency with that past analysis, I ran several index ETFs for each of these stock types (19 in all) through
the Asset Correlation tool in Portfolio Visualizer.
Beyond that, no modeling of
asset correlations would be brought into the modeling because risky asset correlations go to one in a crisis.
The asset correlation tool computes the Pearson correlation for the selected assets based on daily, monthly or annual asset returns.
The technical criticisms include arguments that standard deviation might be the wrong risk measurement,
asset correlations are not fixed and change over time, and investor behavior is not rational.
Diversification reduces risk by combining investments that lower
asset correlation.
Based on your allocation and the data it extracts from Yahoo Finance it is able to provide you with the actual projected annualized rate of return, standard deviation, beta, yield and it calculates
the assets correlations to tell you the level of diversification.
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Asset Correlations» Asset Class Correlations» Asset Autocorrelation» Asset Cointegration»