# What is the highest possible correlation between assets?

## What is the highest possible correlation between assets?

Correlation is measured on a scale of -1.0 to +1.0:

• If two assets have an expected return correlation of 1.0, that means they are perfectly correlated.
• A perfectly negative correlation (-1.0) implies that one asset’s gain is proportionally matched by the other asset’s loss.

## What is asset correlation?

Asset correlation is a measure of how investments move relative to one another. When assets move in the same direction at the same time, they are considered to be positively correlated. When one asset tends to move up when the other goes down, the two assets are considered to be negatively correlated.

How do you calculate asset correlation?

To find the correlation between two stocks, you’ll start by finding the average price for each one. Choose a time period, then add up each stock’s daily price for that time period and divide by the number of days in the period. That’s the average price. Next, you’ll calculate a daily deviation for each stock.

What are low correlation assets?

In investing, a low correlation means that different asset types have not performed in the same way: When returns on some asset types decline, returns on others decline less, or indeed gain. For investors, this diversification has obvious benefits.

### What is the best correlation for a portfolio?

1.00
A correlation of 1.00 indicates perfect correlation, while lower numbers indicate that the asset classes are not correlated and generally do not move in tandem with each other—or, when the market moves down, these asset classes may not fall as much as the market in general, which could mitigate risk in your portfolio.

### What is a high stock correlation?

The correlation coefficient’s values range between -1.0 and 1.0. For example, large-cap mutual funds generally have a high positive correlation to the Standard and Poor’s (S&P) 500 Index or nearly one. Small-cap stocks tend to have a positive correlation to the S&P, but it’s not as high or approximately 0.8.

What is Markowitz portfolio optimization?

In finance, the Markowitz model ─ put forward by Harry Markowitz in 1952 ─ is a portfolio optimization model; it assists in the selection of the most efficient portfolio by analyzing various possible portfolios of the given securities.

What is a good correlation coefficient for stocks?

A correlation coefficient of 1 indicates a perfect positive correlation between the prices of two stocks, meaning the stocks always move the same direction by the same amount. A coefficient of -1 indicates a perfect negative correlation, meaning that the stocks have historically always moved in the opposite direction.

## What is a good correlation for portfolio?

A correlation of 1.00 indicates perfect correlation, while lower numbers indicate that the asset classes are not correlated and generally do not move in tandem with each other—or, when the market moves down, these asset classes may not fall as much as the market in general, which could mitigate risk in your portfolio.

## What does it mean when an asset is highly correlated?

Asset correlation is a measure of how investments move in relation to one another and when. When assets move in the same direction at the same time, they are considered to be highly correlated.

Why is correlation important in asset allocation models?

The shrinking number of asset categories with low correlations should give cash and cash equivalents an increased and higher priority to asset allocation models. Cash has a zero correlation with most other investment assets and provides a means to preserve capital in bear markets. Why is Correlation Important?

Is there a problem with low asset correlation?

The vast majority of investments will have some correlation (between 0 and +1). The goal is to have low asset correlation. The fact that most investments are positively correlated is a problem and means finding the right mixture of assets more challenging. Another problem is correlations are dynamic.

### What does a correlation of 1.00 mean?

A correlation of 1.00 indicates perfect correlation, while lower numbers indicate that the asset classes are not correlated and generally do not move in tandem with each other—or, when the market moves down, these asset classes may not fall as much as the market in general, which could mitigate risk in your portfolio.