Portfolio Management

Portfolio Management – Correlation

Two concepts are important to hedge funds as they manage risk and portfolio allocation:

• Standard deviation
• Correlation

Correlation

Correlation measures the degree to which two investments move up & down together. Portfolio management involves managing different investments of varying correlation coefficients to achieve a return. Some stocks are unattractive by themselves but attractive as part of a portfolio.

Correlation coefficient of:
1: two investments move up and down together
0: unrelated
-1: when one investment is going up, the other is going down
There is a tendency of stocks to go up and down together. To achieve diversification, a portfolio manager searches for cases of negative correlation.