Diversification is one of the hottest topics around investing and one of the goals that investors aspire to have in their portfolios. We are able to gauge the degree of diversification from market to market by using. Correlation rates the historical likelihood that two given markets have traded in the same direction on a scale of -1 (opposite movement) to +1 (corresponding movement).
After summarizing correlation’s use and characteristics, Tom and Tony dive into one of correlation’s greatest complexities – that it is dynamic across time.
A study is performed by looking at the following markets’ historical correlations to the S&P 500:
- Emerging Markets (EEM)
- EuroStoxx (FEZ)
- Crude Oil (USO)
- Gold (GLD)
- Silver (SLV)
- Metals/Mining Stocks (XME)
- US Treasuries (TLT)
- Euro Currency (FXE)
We looked at how correlations changed from when the S&P 500 was in a normal environment to when the equity market was trading with. This showed us what markets have provided good opportunity for diversification in the past.