Asset Correlations

[phk]

There's a real easy and simple to use website, link: http://www.assetcorrelation.com/

You can enter certain securities (bond, common stock, Sector ETF, Country ETF) and see the overall correlation and you can get a 6 month correlation through time.

The website focuses largely under the assumption that all available asset classes will be used to engineer the desired risk and return.

An important aspect of risk management is the estimation of the correlations between the price movements of different assets. The probability of large loss for a certain portfolio is dominated by correlated moves of its different constituents. For example, a position which is simultaneously long in stocks and short in bonds is risky because stocks and bonds tend to move in opposite directions in crisis periods. (This is the so-called 'flight to quality' effect.)

[Torie]

The problem is that when you need diversification the most, in times of economic and financial stress, the correlations between asset classes go way up, and that can include high quality corporate bonds. That is what happened in the financial meltdown. Almost all asset classes were almost seamlessly correlated - in the downward direction. Heck, my high quality short term corporate bond fund dropped close to 15% as I recall at one point. That was pretty sobering.

[phk]

The problem is that when you need diversification the most, in times of economic and financial stress, the correlations between asset classes go way up, and that can include high quality corporate bonds. That is what happened in the financial meltdown. Almost all asset classes were almost seamlessly correlated - in the downward direction. Heck, my high quality short term corporate bond fund dropped close to 15% as I recall at one point. That was pretty sobering.

You mean, +?

[Torie]

The problem is that when you need diversification the most, in times of economic and financial stress, the correlations between asset classes go way up, and that can include high quality corporate bonds. That is what happened in the financial meltdown. Almost all asset classes were almost seamlessly correlated - in the downward direction. Heck, my high quality short term corporate bond fund dropped close to 15% as I recall at one point. That was pretty sobering.

You mean, +?

If by "+" you mean, was the correlation was positive, the answer is yes, since they all moved "in the downward direction."

[phk]

The problem is that when you need diversification the most, in times of economic and financial stress, the correlations between asset classes go way up, and that can include high quality corporate bonds. That is what happened in the financial meltdown. Almost all asset classes were almost seamlessly correlated - in the downward direction. Heck, my high quality short term corporate bond fund dropped close to 15% as I recall at one point. That was pretty sobering.

You mean, +?

If by "+" you mean, was the correlation was positive, the answer is yes, since they all moved "in the downward direction."

Yep.

One of my favorite econ quotes which is from the book "When Genius Failed": "In times of crises, all the correlations go to 1".

Btw for people who haven't learned much stats, correlations vary from p∈ℝ ρ∈[-1,1], with -1 denoting perfectly inverse and negative relationship between two variables. With 1 denoting a perfectly positive relationship and 0 meaning no relationship.