 # Correlation Matrix BullGlobe

## 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.

The correlation measurement is expressed as a number between +1 and -1. A zero correlation indicates there is no relationship between the assets. A +1 indicates an absolute positive correlation (they always move together in the same direction). A -1 indicates an absolute negative correlation (they always move together in opposite directions of each other).

### Why is Correlation Important?

The financial concept of asset correlation is important because the goal of asset allocation is to combine assets with low correlation. The purpose of asset allocation is to lower portfolio volatility. By putting low correlation and/or negatively correlated investments in a portfolio, the overall volatility of the portfolio is lowered.

Combining asset categories that have a low correlation reduces the volatility of the portfolio as a whole and allows the portfolio manager to invest more aggressively. In other words, a portfolio manager willing to accept a given amount of volatility can invest in higher return/risk investments. This is because the volatility of the overall portfolio is lower due to combining non-correlated assets. This is called portfolio optimization.

### Correlation Matrix

A correlation matrix is a table showing correlation coefficients between variables. Each cell in the table shows the correlation between the returns of two stocks or portfolios. In addition, the matrix displays a heatmap that helps you identify stocks with low correlation. Green cells indicate the two assets are highly correlated, yellow cells show mildly or non-correlated stock pairs, and red cells indicate that two assets have a very low or negative correlation.

The line of 1.00s going from the top right to the bottom left (in dark green) is the main diagonal, which shows that each variable always perfectly correlates with itself. The matrix is symmetrical, with the same correlation is shown above the main diagonal being a mirror image of those below the main diagonal.

Below you can see a real example of one of our portfolios’ correlation matrices. It displays the correlation of all assets in the portfolio, the actual portfolio, its optimized version, and the S&P 500.

The matrix allows us to, for instance, determine the coefficient of correlation between the S&P 500 and BND (an ETF that tracks a broad bond portfolio) by following these steps:

• Identify each component of the correlation pair, one on the vertical side of the matrix above and the other one on the horizontal side.
• E.g. find BND on the vertical list of assets and find S&P 500 on the horizontal list.
• Trace a vertical and horizontal line from each of the assets (S&P 500 and BND) until they cross to find the cell that displays their correlation coefficient.

## Efficient Frontier Line

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...

## Correlation Matrix

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...

## Value At Risk (VaR)

Value at Risk (VaR) Value at Risk (or VaR) is a measure that is used to statistically quantify the level of risk of a certain investment over a specific period of time. It essentially estimates the potential losses you may encounter in a given timeframe (days, months, years, etc.) for...

## Historical Drawdown

Drawdown Drawdown is a measure of downside risk. It is a simple metric that tells us (on a percentage basis) how much an investment declined from its peak (its highest value) to its trough (its lowest value). By analyzing an asset’s drawdown history we can see how it has been affected by economic...

## Volatility Histogram

Histogram of returns A histogram is a type of graph that plots the frequency distribution of your returns. In simpler words, it captures the frequency (number of times) in which certain returns happen and it separates them into different buckets (bins or ranges). Let’s build a quick example in order...

## Asset Summary

The Portfolio Asset Summary is a table that shows some basic key information about each asset in your portfolio. Assets The first column shows the name of every asset in your portfolio. If you look up these names online, you may find tons of additional information about them. Tickers The...

## Performance & Risk Metrics

What does investment performance mean? In the investment world, performance is essentially translated to returns (gains or losses) on your investment and the progress of those returns over time. Beginning Balance The Beginning Balance is the money you started investing with. In our portfolios, we set a hypothetical beginning balance...

## Yearly Performance

Looking at the period-over-period performance of an investment can also be helpful to detect longer-term trends. It is calculated similarly to the cumulative performance; however, in this case, we do not use the initial value as the base for the returns, we look at each period individually and compute the percentage change...  Scroll to Top ### discover the finance world 