Correlation Analysis
The Correlation page computes Pearson correlation coefficients between the daily returns of selected instruments over a configurable time window.
Correlation Coefficient
| Value | Meaning |
|---|---|
| +0.7 to +1.0 | Strong positive correlation - instruments tend to move together |
| +0.3 to +0.69 | Moderate positive correlation |
| -0.29 to +0.29 | Weak or no correlation - instruments move independently |
| -0.69 to -0.3 | Moderate negative correlation |
| -1.0 to -0.7 | Strong negative correlation - instruments tend to move in opposite directions |
How to Interpret
- Diversification: A well-diversified portfolio should contain instruments with low or negative correlations. If all your holdings are strongly correlated (+0.8+), a single adverse event could impact your entire portfolio simultaneously.
- Pair identification: Strongly correlated pairs may present mean-reversion opportunities when they temporarily diverge.
- Risk concentration: If your portfolio shows high average correlation, your effective diversification is lower than the number of holdings suggests.
Time Window
The default window is 30 days. Shorter windows (7-14 days) capture recent regime changes; longer windows (90-180 days) show structural relationships. Correlations are not static, so they should be monitored regularly.