Our asset correlation calculator is like a navigational compass for your portfolio management. With our tool, you can measure the correlation among the selected assets.


What is Portfolio Correlation, and what does it signify in finance?

Portfolio correlation, in the world of financial asset management & investment and portfolio management, is a measure of how different assets within an investment portfolio move in relation to each other, in simple words portfolio correlation is calculated considering how the NAV values for each asset have changed wrt to other assets during a given time period. It signifies the degree of interdependence between these assets. The correlation coefficient ranges from -1 to 1.

Role of Portfolio Correlation in Diversification and why is it important?

Correlation is crucial for diversifying investment portfolios in financial planning and wealth management. It measures how different assets move in relation to each other. Diversifying with low or negatively correlated assets is a key risk management strategy. Wealth managers balance correlations to construct portfolios optimizing returns while minimizing risk for clients.

Diversification is essential in an investment portfolio to spread and enhance potential returns. Investing in various assets, like stocks, bonds, and real estate, reduces exposure to poor performance in any single asset or class. This minimizes the impact of market volatility and economic downturns, serving as a cornerstone of risk management. It increases the probability of achieving long-term financial goals while minimizing the impact of individual asset failures.

Portfolio correlation values for your investment strategy for Diversification:

  • -1 to -0.4 - Asset pair with negative correlation  (excellent diversification)

  • -0.4 to 0 - Asset pair with slight negative correlation (good diversification

  • 0 to 0.6 - Asset pair with mild positive correlation (moderate diversification)

  • 0.6 to 1 - Asset pair with strong positive correlation (poor diversification)

  • 1 - Asset pair with 100% positive correlation (no diversification)

Key points:

  • A correlation of 1 indicates a perfect positive correlation, meaning two assets move in sync.

  • A correlation of -1 signifies a perfect negative correlation, with assets moving inversely.

  • A correlation of 0 means no linear relationship; assets move independently.