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Markets & Instruments

What Is Correlation Risk

Two positions on two different indices feel like two trades. Measured across 2,860 days, the Dow and the Nasdaq move together four days out of five, and the Nasdaq moves forty percent further when they do. This paper shows you how to measure that for any pair you hold, and what to do with the answer.

Difficulty
Intermediate
Reading time
7 min
Pages
9

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The skill

The two are not the same, but they are far closer than the account statement suggests — and "far closer" can be given a number in about ten minutes, for any two things you hold at once.

Look at them side by side

Those are the same fifty days. Not identical, but not two independent stories either — the same peaks, the same troughs, mostly in the same weeks, with the Nasdaq swinging further at each of them.

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