Quant charts explained: Correlation

Correlation shows the relationship between the performance of two or more products, benchmarks or the underlying products in a portfolio.

What does the table show?

The table indicates how the returns of one product moved in relation to another over a defined period

 

How to interpret the chart

Positive Correlation: A positive historical relationship exists between these products which tend to move in the same direction

No Correlation: No historical relationship exists between these products

Negative Correlation: A negative historical relationship exists between these products which tend to move in the opposite direction

There are portfolio diversification benefits when adding investments with a correlation of less than 1. The resulting portfolio risk will be less than when a product with higher correlation is added.

When to use the chart

This calculation is useful to show the historical relationship between selected products, benchmarks or portfolios

iRate specific

If a benchmark is not specified, correlation of absolute returns is calculated. If a benchmark is provided, correlation of excess returns is calculated

Evaluating the correlation of absolute returns is useful for investments of different asset classes. For investments in the same asset class, it is more useful to select correlation of excess returns as it compares the managers’ value add (Alpha)

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