Small-cap stocks, for instance, have a long-term correlation of 0.72 with large-cap stocks, according to the Ibbotson SBBI 2011 Classic Yearbook.
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Though long-term Treasuries have historically had low correlation coefficients with large-cap stocks, intermediate-term Treasuries are even less correlated with large-cap stocks.
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However, as Geoffrey Dicks at Novus Capital markets pointed out recently, short-term, the correlation with the official data is pretty weak.
At BrandMixer, we have seen phrase and adjective tag clouds yield a stronger correlation to increasing long-term product sales vs. a popular meme on Twitter.
The long-term coefficient of correlation to the one-year Treasury is .80 while the ten-year Treasury scores .75 and the 30-year Treasury is lower still at .66.
According to the Ibbotson SBBI 2011 Yearbook, long-term Treasuries have a correlation coefficient of 0.11 to large-cap stocks.
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However, intermediate-term Treasuries have a correlation coefficient of 0.08.
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Michael Morgan, an experimental psychologist at Sussex University, admits that there are holes in the experimental record that need to be filled before the link between the drug and nasty long-term effects moves from correlation to causation.
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The only asset class they could find with a positive correlation was gold but the long-term real return of gold has been just 1% a year, barely better than cash.
If markets were perfectly efficient, deep-pocketed long-term investors would capitalize on the correlation inefficiency.
On a day-to-day basis, the correlation can break, but over the long term it has been strong because the value of the Canadian dollar has good reason to be sensitive to the price of oil.
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These folks may decide to include asset classes that have no real long-term return with the hope that low correlation with other investment will generate enough excess return from rebalancing to make up for the shortfall.
Given all of the factors that contribute to inflation in the short run, this correlation is truly remarkable, but there are near-term deviations in times like this when central banks are fighting deflation trends actively or due to economic swings, currency changes, spikes in oil prices, or other factors.
First, correlations are not static, and second, low correlation itself does not guarantee a portfolio benefit in the short-term.
Trade with China, if it shows anything, demonstrates that there is little correlation between commerce and political liberalization, at least over the short term.
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But the correlation is strong enough to suggest a general connection between faulty short-term desire management and bad financial outcomes.
Low correlation between two asset classes does not guarantee risk reduction in the short-term.
With an understanding based only on correlation and not causality, we challenge mix modelers to rationally explain where their long-term factor comes from (whatever value it is) and by what mechanism or how it becomes actual, longer-term consumer purchases.
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