CORRELATION OF RISKY ASSETS

14 Oct

In first place, I would like to emphasize on the importance of calculating the correlation between a sample of stocks or other risky assets. Knowing the correlation is important in creating a portfolio because it helps to diversify risk. In other words, you do not want to own two positively correlated items because if the price of either falls, then the price of the other correlated asset will fall too.

Taking the previous into consideration, an example of two correlated stocks is Google and Microsoft. This could be explained by the fact that both corporations are big competitors of the “technology era.”

Actually, after doing some research, I found out that the correlation between these two corporations is 0.79.

Source: http://www.macroaxis.com/invest/menu/pitchletHome/marketCorrelation

Question of the week: What is considered to be a good range of correlation between risky assets in a portfolio? For example, would you say that a correlation of 0.5 (-0.5) is high? Is it possible to build a portfolio with correlation equal to 0?

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One Response to “CORRELATION OF RISKY ASSETS”

  1. shannon7774 October 31, 2011 at 11:36 AM #

    If you can reduce the variance to 0 then it is a “risk-free” investment. I do not know the answer to the other part of your question. I think it is a great question for a research project. What is the standard risk for assets with different return rates? One could try to answer this by doing statistics on the market.

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