This article shows a study of correlation on a number of stocks and ETFs. The correlation uses closing prices data since August 1 2008.
Correlation is very useful for hedging and diversification. An investor who wants diversification should always look at the correlation factor between stocks and should not buy highly correlated ones. Similarly, an investor who is looking at hedging long position should be looking at negatively correlated stocks.
The data is also useful for investors in registered accounts who cannot short stocks or buy puts. An investor who wishes to shirt oil for example, can simply buy UAUA as the two stocks have been highly negatively correlated.
Clearly, there is a large relationship between currencies and oil and gold. Clearly also there are very high negative correlations between the general markets and oil and gold.
Please note that correlation does not necessarily mean a causality relationship, but it does indicate that the prices march together.
The following table shows the high positive and negative correlations of over 0.85 (or -0.85):
(Please click on image to enlarge.)
The following table shows the positive and negative very high correlations of over 0.90 (or -0.90):
The following table shows the positive and negative extremely high correlations of over 0.95 (or -0.95):
The following table shows the list of positive correlations (<0.90) for each of the symbols:
Similarly, this table shows the list of negative correlations (<-0.90):
(Please click on image to enlarge)
Some of the data may surprise investors. Clearly there are clusters of highly correlated stocks. Please see the maps below, which show a graphical representation of the very highly correlated stocks (<0.95), green edges are positive correlations, red are negative:
And this is a graphical representation of the very highly correlated stocks (>0.90):
Monday, August 25, 2008
Posted by The Shocked Investor at 9:58 AM
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