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In one of my earlier I had mentioned about Correlation to avoid market risk. Correlation is nothing but the relation between any two entities. For example there can be correlation between gold prices and stock conditions or monsoon and rural consumption.
Correlation is measured by the correlation co-efficient. A positive correlation coefficient indicates that both values move in same direction, while a negative indicates it moves in opposite direction.
The maximum absolute value of correlation is 1. A value closer to 1 indicates strong correlation while value closer to 0 shows weak. +1 shows that the value move in perfect tangent, while -1 shows that the values move in exactly the opposite direction by equal amounts.
Correlation is the key to effective diversification. It is better to have a good set of 10-20 companies at max in your portfolio. It is important to not only diversify in stocks, but also in asset classes.
Correlation is measured by the correlation co-efficient. A positive correlation coefficient indicates that both values move in same direction, while a negative indicates it moves in opposite direction.
The maximum absolute value of correlation is 1. A value closer to 1 indicates strong correlation while value closer to 0 shows weak. +1 shows that the value move in perfect tangent, while -1 shows that the values move in exactly the opposite direction by equal amounts.
Correlation is the key to effective diversification. It is better to have a good set of 10-20 companies at max in your portfolio. It is important to not only diversify in stocks, but also in asset classes.
