CORRELATION AND

DIVERSIFICATION
NUR BALQISH IZZATI
NUR IZZATY
MOHAMMAD SYAMIR HILMI
MUHAMMAD HAKIMI
 CORRELATION
• Statistic that measures the degree to which two
securities move in relation to each other.
• A perfect positive correlation means that the
correlation coefficient is exactly 1. This implies that
as one security moves, either up or down, the other
security moves in lockstep, in the same direction.
• A perfect negative correlation means that two
assets move in opposite directions, while a zero
correlation implies no relationship at all.
 DIVERSIFICATION
• Diversification is the process of allocating capital in
a way that reduces the exposure to any one
particular asset or risk.
• Diversification does not guarantee returns nor
protect you against losses.
• Mathematically, diversification is minimising the
variations in your returns by averaging the expected
return of each of your investments.
HOW
DIVERSIFICATION
WORK:
-Instead of investing all of your money in a single stock, you invest in a
variety of stocks, bonds and other securities. By spreading out the risk,
you lower the odds that all of your investments will lose at once. It might
not be glamorous, but it's a safe way to grow your money over a long
period of time

-Most of professional investor agree that, although it does not guarantee

against loss, diversification is the most important component of reaching
long-range financial goals while minimizing risk. Here, we look at why this
is true and how to accomplish diversification in your portfolio.

- Diversification works its important because it takes the long view of

investing. It's nearly impossible to predict the short-term performance of
the financial markets
HOW THEY CORRELATED
WITH DIFFERENT SERIES
OF ASSETS?
Positive Correlation
When two or more assets move up and down together. Stocks in the same
industry would have a high positive correlation. They would probably be
affected similarly by events.

Zero Correlation
When two or more assets show no relationship to each other. Combining
multiple assets with no correlation would be an ideal diversified portfolio
because volatility (risk) of the whole portfolio would theoretically be
minimized. In the real world most assets have some correlation; so a low
asset correlation such as between gold and S&P stocks, would be a good
example of near non-correlated assets.

Negative Correlation
When two or more investments move inversely to each other they have
negative correlation. Two assets that were perfectly negatively correlated
would eliminate risk of the combined assets.