Correlations

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Correlation is a useful metric to evaluate or build a diversified portfolio. <p>To calculate correlation, Portfolio Lab uses monthly returns and <span style="font-weight: bold;">time-weighted</span> computation: recent months are given more importance (weight) than older ones, making the result less sensitive to extreme past values and the choice of window length. Note that most correlation calculators - for example the CORREL function in Excel - use a simpler approach, giving equal weights to all months.<br><br>When analyzing correlations, it is important to keep in mind that:<br><ul><li>Correlations are not stable. Going forward, correlations calculated on historical data may not hold.</li><li>Correlation indicates if variables tend to move in the same direction, but gives no indication about the amplitude of these movements. When combining low correlated assets, it is necessary to also pay attention to their expected returns.</li></ul>

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