The investor cognizes the overall diversification in the portfolio with this matrix’s help. The correlation matrix can be beneficial and handy for investors with a portfolio of multiple securities. This diversification can help them reduce Idiosyncratic risk. The Short Term Corporate Bond ETF (SPSB) tracks a market-value-weighted index of fixed-rate investment-grade nonconvertible US corporate bonds with 1-3 years remaining in maturity.Īs it is always suggested not to put all your eggs in one basket similarly, investors should have a diversified pool of assets in their portfolio. Stock Market ETF, and SPDR Portfolio Short Term Corporate Bond ETF. Other than stocks, the portfolio also includes Vanguard Intermediate, iShares Core S&P Total U.S. As seen in the MarketXLS template screenshot, a different set of securities is taken as part of the portfolio to measure the correlation. Not only stocks but the same matrix can help measure the correlation between different combinations of stocks, mutual funds, and exchange-traded debt funds. However, it may not be easy to spot if the portfolio consists of various securities such as mutual funds, bonds, or ETFs. Sometimes stock correlation can be predictable so that two stocks in the same industry or sector will tend to move in the same direction and react to the market in the same way. Still, if their returns depend on the same thing (e.g., the economy in a particular state), their portfolio is getting almost no protection from diversification. Landsberg rightly says that investors usually may not be as diversified as they think and may have stocks in different sectors. It would give a more cohesive view of their portfolio. While focusing on the portfolio’s individual stocks’ performance, it is equally important to understand how the stocks move alongside each other. All you need to do is add the ticker of the stocks part of your portfolio in the ticker column. In the Template, the investor can create an N*N matrix of stocks and compare the overall correlation of stocks. Through this matrix, investors can create a portfolio of stocks based on their risk and correlation coefficients. MarketXLS Template for Correlation Matrix Find this template: For example, to know the correlation between AAPL and FB, look under the intersecting cell between AAPL and FB. The correlation matrix gives us the correlation between any two stocks. For instance, if it is a 10-stock portfolio (10 being the n here), we need to create a 10 x 10 matrix. So, when we have multiple stocks in the portfolio, the correlations between stocks are all stacked up in a n x n (read it as n by n) matrix. However, when we have more stocks, we resort to a matrix to find their correlations. While the correlation coefficient is a measure of the historical relationship between two stocks, it may guide the future relationship between the assets.Ĭorrelation works fine if we have two stocks in the portfolio. A negative correlation would show a downward-sloping line. If mapped graphically, a positive correlation would show an upward-sloping line. The correlation coefficient is a linear regression performed on each stock’s returns against the other. Including assets that have a low correlation to each other reduces the overall risk for a portfolio. This concept helps to optimize expected returns against a certain level of risk. Modern portfolio theory (MPT) uses a measure of the correlation of all the assets in a portfolio to help determine the most efficient frontier. It measures the amount of diversification among the assets contained in a portfolio. A perfect negative correlation means that two assets move in the opposite direction and a correlation coefficient of 0 indicates no linear relation between the two securities.Ĭorrelation is a helpful statistic often used in portfolio management. A perfect positive correlation is when the coefficient value is equal to +1, which means the two securities move in the same direction with the same level. The correlation coefficient value must fall between -1 and +1. It is a handy statistic used for individual securities, like stocks, to measure general market correlation, such as how asset classes or broad markets move concerning each other. Correlation is a stock comparison tool that measures the degree to which two securities (in investment) move about each other.