Posts Tagged ‘portfolio theory’

23rd September
2008
written by simplelight

Others have weighed in on whether volatility should be considered an asset class. From the point of view of a long term investor it clearly doesn’t make sense to buy and hold volatility. (In that sense, it is the ultimate cyclical asset class and we should be glad we don’t live in a world of ever increasing volatility!). However, in terms of the diversification benefit for a portfolio, the VIX does exhibit low (and negative) correlation with many of the major asset classes. The table below shows the correlation matrix for major asset classes over the past 750 days, a period during which the VIX had negative correlation with US stocks and real estate and no correlation with European stocks. Notice, though, that a similar diversification benefit could probably have been achieved with a combination of treasuries and bonds.

    TIP AGG GSG VNQ EEM EFA VB VV
Ishares Lehman Ti TIP                
Ishares Leh Agg F AGG 0.95              
Ishares Gsci Cmdt GSG 0.90 0.78            
Vanguard Sf Reit VNQ -0.78 -0.69 -0.69          
Ishares Msci E.M. EEM 0.56 0.68 0.52 -0.37        
Ishares Msci Eafe EFA -0.14 0.05 -0.14 0.25 0.70      
Vanguard Sm Cap E VB -0.54 -0.38 -0.47 0.63 0.25 0.75    
Vanguard Lg Cap E VV -0.32 -0.12 -0.32 0.39 0.56 0.94 0.89  
Cboe Volatility I ^VIX 0.78 0.81 0.60 -0.80 0.55 0.00 -0.39 -0.14

Note: this chart was generated on the AssetCorrelation website which is an excellent resource for monitoring the diversification of your own portfolio.

19th June
2008
written by simplelight

There is a promising new website called Asset Correlation which shows the correlation matrix for a host of different asset classes over the past 90 trading days. I have been tracking it for a few months and it is amazing how all the asset classes exhibited far higher correlation during the recent panic. As normalcy has gradually returned to the markets it is interesting to see how the historical scenario of lower correlation between asset classes has returned. A few months ago almost all the cells in the matrix were green and correlations were hovering around 80-90% for most of the major classes. As of today, there is far lower correlation between the classes (indicated by the larger number of yellow and red cells). It will be interesting to keep an eye on this website over the next few months.