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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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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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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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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If markets were perfectly efficient, deep-pocketed long-term investors would capitalize on the correlation inefficiency.
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.
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.
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.
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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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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