It describes how closely the returns of the assets in a portfolio are correlated. The correlation matrix is a fundamental tool for stock market investors. A single number for the correlation wouldn’t be sufficient. Let’s say you have several stocks or investments. – 1 means that if one asset increases in value, the other decreases in lock-step.0 means that the two assets are perfectly decoupled – there’s no relationship between the price movement of either asset.1 means that if one asset increases in value, the other increases in tandem.The correlation coefficient between two assets is a single number between -1 and 1. They use a tool called the correlation coefficient (also called the Pearson product-moment correlation coefficient). How do financial analysts describe the strength of this relationship? After all, if one stock falls, you don’t want your other investments to drop like a stone as well. Well, a diverse portfolio contains uncorrelated assets – in other words, assets that don’t go up and down in tandem. But what do we mean by a diverse portfolio? This can never be stressed too much or too often. It’s an age-old mantra, but investors need to diversify. Learn why investors should know about correlation matrices, and download an Excel-VBA spreadsheet to calculate this important asset allocation tool
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