Recoupled Correlations May Be Jeopardizing Your Portfolios

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In Search of Low Correlation

Building a low-correlation portfolio has been difficult in the past 10 years. Asset classes are increasingly moving in the same direction. Here's a review of the correlation patterns of seven different asset classes from 1970 to 2008, with some tips on how to improve portfolio diversification going forward.

What Diversifies Large Blend

If you start with a large blend allocation, what other styles should you add to the mix to protect against a market downturn? Will small value work? Is mid growth redundant? This study of the correlation among style boxes yields surprising clues as to how equity allocations should be constructed.

How Correlations Change

Still plugging the same old correlation coefficient into your portfolio optimizer? If so, you're ignoring the fact that correlations move—especially among fixed-income and non-U.S. equity indexes. This chart illustrates how much they've changed over the past 20 years.