Correlation is a statistical measure that shows the relationship between two objects. Correlation may range between +1 and -1. If correlation between the objects is 0 that means they are not dependable on each other. If correlation is negative, that means they move in different directions, while +1 correlation would mean that fluctuations are identical.
Correlation is very important in investment management because every investment manager tries to optimize investment portfolio in the way that investments would correlate less with each other and whole market. The lower correlation is in the investment portfolio the better is the diversification.
However, when markets became so global and computerized, they reacting very fast to every big event and some level of correlation is inevitable for risky asset classes in our day’s reality.
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