The Volatility of Correlation

Coaker II, William J.
February 2006
Journal of Financial Planning;Feb2006, Vol. 19 Issue 2, p58
Academic Journal
• The severity of how much correlation changes, even over longer periods of time, has not been adequately understood. • This paper analyzes the changing correlation of 15 asset classes measured against the S&P 500 over a 35-year period, and the impact of those changes on asset allocation decisions. It measures the correlations in rolling one-, three-, five-, and ten-year time series, from 1970 to 2004. • The article also evaluates whether 15 asset classes have helped or hurt in years the S&P 500 has declined, and whether growth or value styles are more correlated to the index. • The average variance in correlation measured 0.98 over one year and 0.25 over ten years. In short the relationship among many of the asset classes appears to be inherently unstable. • Large value provides more diversification benefits than large growth, and small value provides more diversification than small blend or small growth. Emerging markets may provide higher returns and greater diversification than developed nations. But the low correlations of small value and real estate may not hold up during the next broad market decline. • Correlations exhibit uniqueness, meaning periods are distinct from previous time periods. For example, international stocks' correlation to the S&P 500 was 0.48 from 1970 to 1997, but 0.83 from 1998 to 2002. • Rather than rely on historical correlations, a more comprehensive and dynamic approach is needed in making asset allocation decisions. INSET: Executive Summary.


Related Articles

  • the skeptic's guide to mutual funds. McLean, Bethany // Fortune;3/15/1999, Vol. 139 Issue 5, p128 

    Presents information related to mutual funds. Growth of equity funds since 1980; Information on strategies that are built mainly around index funds; Details of Standard & Poor's 500 Index; Importance of asset allocation; Skepticism about past returns as a method of choosing funds.

  • OVERRELYING ON THE LONG TERM. Lutschaunig, Art // On Wall Street;Aug2007, Vol. 17 Issue 8, p56 

    The article discusses the results of Morningstar's analysis of the monthly returns of the S&P 500 Index and the Ibbotson Small-Cap Index and its benefits to investment planning and asset-allocation exercises. The analysis was made to determine how wide the variances might be between the actual...

  • UBS report predicts huge equities buy.  // Pensions & Investments;3/23/2009, Vol. 37 Issue 6, p17 

    The article reports that Standard & Poor's 500 companies' pension plans are expected to buy between $100 billion and $150 billion in stocks before the end of 2009 to get back to their target allocations. It is stated that the plans' actual allocations stood at 46% at the end of 2008, and UBS...

  • Schroders cuts initial charge to celebrate first- quartile returns. Davis, Matt // Money Marketing;11/17/2005, p28 

    The article reports that Schroders PLC has cut initial charge to celebrate its first-quartile returns. Head of multi-manager Andrew Yeadon says flexibility and tactical asset allocation are key drivers of this performance. The Standard & Poor cautious managed distribution portfolio has returned...

  • New Hampshire Cuts Managers. Giardina, Michael // Investment Management Weekly;5/3/2010, p2 

    The article reports on a measure approved by the Investment Committee of the New Hampshire Retirement System (NHRS) in April 2010 to restructure its domestic equity portfolio, which terminates several active large-capitalization growth and micro-capitalization managers in the reorganization. The...

  • S&P downgrades De Blonay's £438m Jupiter Financial Opps fund. Salih, Chris // Fundweb;10/ 9/2012, p5 

    The article informs that Guy De Blonay's 438m pound Jupiter Financial Opportunities fund has been downgraded by Standard and Poor from a platinum rating to gold. It has been informed that management of the Financial Opportunities fund has been taken De Blonay from Philip Gibbs in January 2011....

  • Index tracking and enhanced indexation using a parametric approach. Chávez-Bedoya, Luis; Birge, John R. // Journal of Economics, Finance & Administrative Science;Jun2014, Vol. 19 Issue 36, p19 

    Based on the work of Brandt et al. (2009), we formulate an index tracking and enhanced indexation model using a parametric approach. The portfolio weights are modeled as functions of assets characteristics and similarity measures of the assets with the index to track. This approach permits...

  • Cut your costs with ETFs.  // Dow Theory Forecasts;9/17/2012, Vol. 68 Issue 38, p1 

    The article focuses on the growth of exchange-traded funds (ETFs) in which total assets raised to 16 percent in August 2012. It is stated that low-cost ETFs offer greater trading flexibility and transparency than traditional open-end funds. It further discusses ETFs of various companies...

  • Fidelity Fifty.  // Morningstar Fund Family Reports: Fidelity;May2010, Issue 84, p12 

    The article offers information on the economic performance and investments values of the Fidelity Fifty, a mutual fund offered by Fidelity Investments. It states that the fund is a collection of 50 stocks under the Standard & Poor's (S&P) 500 index which is led by Peter Saperstone. It also...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics