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URL:  http://boards.fool.com/when-you-say-8220it-is-sufficient-that-the-26107795.aspx

Subject:  Re: CAGR/GSD Limits of Blends Date:  11/16/2007  8:12 PM
Author:  emintz Number:  203976 of 252701

when you say “It is sufficient that the correlation be less than 1.”, I think you have the correlation coefficient in mind. The correlation coefficient is the Cov(X,Y) divided by the product of the standard deviations, stddev(X)*stddev(Y). Again, the correlation coefficient must be negative to achieve the goal of a blend (diversification).

No, it doesn't.

Consider this:

Year Screen 1 Screen 2 Blend
1 10 10 10
2 30 10 20
3 10 10 10
4 30 30 30
5 10 30 20
6 30 30 30
-------------------------------------
CAGR 19.58 19.58 19.72
GSD 9.58 9.58 7.76


The correlation between screen 1 and screen 2 is 0.33. And yet the blend has a higher CAGR and a lower GSD.

Certainly negative correlation would be better, but it is not necessary for there to be a benefit.

Eric
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