Why is correlation so important, diversification strategies
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June 2024 · 5 min read

Correlation within your Stock Portfolio


In a previous post, we discussed the risk budget that an investor has and the need to allocate that budget between competing investments. This budget choice could be on a cash basis or on a volatility basis, where a certain percentage of their target volatility is allocated to an investment. Correlation and the risk budget are linked as the risk budget is a choice between investing a proportion of your wealth in different investments, each with a varying degree of risk. This is why the correlation amongst those investment choices is an important input.

First, let us define correlation

Correlation is a simple measure that explains the relationship between two variables. It normalises the covariance of the two variables, i.e how they move together, by scaling using the standard deviation of the variables.

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The Math and Models behind the Strategies

Correlation within your Stock Portfolio
October 11, 2022 · 5 min read