Correlation Doesn’t Tell the Whole Story

January 13, 2012 | Tom Salemy, CFA, CAIA, Managing Director

This week’s Chart of the Week covers increased correlations among asset classes. Correlation is a statistical measure showing how two variables move in relation to each other. It can range anywhere from -1 to1, and refers only to the direction of changes. Perfect negative correlation (-1), implies that two items move in completely opposite directions and perfect positive correlation (+1), implies that two items move in lock-step. The chart above shows the five-year correlations between the S&P 500 and a broad set of sample asset classes. As evident, all risk-assets have had a very high positive correlation to the S&P 500 over the past five years. Referring to the chart, aside from the three Treasury indices, no other asset class has a correlation less than .90, which is extremely high.

However, correlation only tells part of the story: just because two asset classes have high correlation does not mean that their returns will end up being the same. In fact, this will most likely never be the case. For example, over the time-frame captured above, despite very high correlations, emerging markets, the S&P 500, and the REIT index have annualized returns of 2.8%, -.56% and -3.48% respectively. Over the past five years, as globalization has become more pronounced and economies more intertwined, correlations have certainly increased to all time high levels. But since correlation does not capture magnitude of returns, investors should continue to utilize an asset allocation model that takes potential risk and return into account.

Tom Salemy, CFA, CAIA
Managing Director

Get to Know Tom

Related Content

Line chart showing the personal savings rate and personal consumption amongst Americans. Chart subtitle: Personal savings rates have retreated from pandemic-induced highs, however several potential headwinds still face the American consumer this holiday season Chart description: Y-axis ranges from -15% to +30%. X-axis shows quarters from 3Q16 to 3Q21. Line for Personal Savings Rate is purple and line for Personal Consumption (Quarter-Over-Quarter Change) is dark green. Both lines were relatively steady up to 2Q20 as the coronavirus pandemic took hold of the economy. The Personal Savings Rate peaked in that quarter to 26.0% and the Consumption Rate Change decreased to the extremein 2Q20 then peaked the following quarter with a 10% increase. Both levels have returned to just slightly higher than normal levels in recent quarters. Chart source: Federal Reserve Bank of St. Louis as of September 30, 2021.

12.02.2021

‘Tis the Season for Consumer Spending?

The COVID-19 pandemic resulted in significant changes to, among a plethora of other things, consumer behavior in the United States….

11.29.2021

In Context Video: Is the 60/40 Portfolio Dead Forever?

In this video, the authors of our recent white paper discuss the 60/40 model portfolio —…

11.18.2021

Bulls on Parade: What’s Driving the 2021 Digital Asset Rally?

The first bitcoin futures ETF — the ProShares Bitcoin Strategy ETF — was approved on October 15th, making it easier…

Combination chart showing number of regulatory actions by the Chinese government (columns) and MSCI China Index cumulative returns (line) by month. Chart subtitle: In recent months, Chinese equities have been hampered by new regulations from Beijing authorities aimed at a variety of industries . Chart description: Left Y-axis shows Cumulative Return in percent of the MSCI China Index, from -20% to +15%. X-axis shows months from November 2020 to September 2021. Right Y-axis shows Number of Beijing Regulatory Actions from 0 to 35. The x-axis line is at the 0% mark for the Cumulative Return axis. Prior to this summer, the number of regulatory actions was very low, typically less than 5 per month in the data shown. In May 2021, there were 9 actions; June saw 3, then July had 14, August had 31, and September had 24. The MSCI China Index has struggled with this increase and has been negative each month since June. Chart Sources: Bloomberg, Cornerstone, and MFS; data as of September 30, 2021.

11.09.2021

China: Regulators, Mount Up!

Over the last year, the Chinese government has enacted a series of new regulations targeting several domestic industries including finance,…

11.04.2021

The More the Merrier?

A driving force for most investors seeking to add a private equity allocation to their portfolios is the strong performance…

11.03.2021

Is the 60/40 Portfolio Dead Forever?

Model portfolios — or those which adhere to a specific set of guidelines surrounding asset allocation and rebalancing — are…

More articles

Subscribe to Research Email Alerts

Research Email Alert Subscription

Research alerts keep you updated on our latest research publications. Simply enter your contact information, choose the research alerts you would like to receive and click Subscribe. Alerts will be sent as research is published.

We respect your privacy. We will never share or sell your information.

Thank You

We appreciate your interest in Marquette Associates.

If you have questions or need further information, please contact us directly and we will respond to your inquiry within 24 hours.

Contact Us >