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Playing with Prophet on Financial Time Series (Again)

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Shift or Stick? Should we really ‘sell in May’?

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What to expect when you are the SPX

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K-Means in investment solutions: fact or fiction

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How to… use bootstrapping in Portfolio Management

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Playing with Prophet on Financial Time Series

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Dual Momentum Analysis

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Random forest: many is better than one

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Using Multidimensional Scaling on financial time series

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Comparing ETF Sector Exposure Using Chord Diagrams

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Euro Stoxx Strategy with Machine Learning

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Hierarchical clustering, using it to invest

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Lasso applied in Portfolio Management

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Markov Switching Regimes say… bear or bullish?

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Exploring Extreme Asset Returns

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BETA: Upside Downside

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Predict returns using historical patterns

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Dream team: Combining classifiers

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Stock classification with ISOMAP

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Could the Stochastic Oscillator be a good way to earn money?

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Correlation and Cointegration

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Momentum premium factor (II): Dual momentum

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Dynamic Markowitz Efficient Frontier

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‘Sell in May and go away’…

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S&P 500 y Relative Strength Index II

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Size Effect Anomaly

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S&P 500 y Relative Strength Index

Tech

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Seasonality systems

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asset management

Using Decomposition to Improve Time Series Prediction

libesa

asset management

Las cadenas de Markov

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Momentum premium factor sobre S&P 500

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asset management

Fractales y series financieras II

Tech

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El gestor vago o inteligente…

jsanchezalmaraz

asset management

¿Por qué usar rendimientos logarítmicos?

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Fuzzy Logic

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El filtro de Kalman

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asset management

Performance and correlated assets

T. Fuertes

05/06/2015

1
Performance and correlated assets

It is well known that an efficient portfolio should be comprised of uncorrelated assets. The objective is to cover possible widespread falls of all portfolio assets. But what is the negative effect of investing in correlated assets? Does the correlation benefit at any point? How often does the correlation work against the earnings?

Firstly, we focus on S&P500 in order to test if the years with more correlation are related to the years with less performance. We split its performance annually, and we calculate the correlation between its components each year. In general, there’s a fairly clear negative relationship between correlation and performance. That is, down trends’ correlation is high. When the return of one stock is negative, the remaining assets comprising the index will fall as well; this will make it difficult to earn if while investing in highly correlated stocks.

S&P500Dispersion

In spite of the negative relationship, in some years (such as 2009), the index performs much like other years, even though the correlation is one of the highest.

S&P500Annuals

What happens if we create a portfolio comprised of some of these S&P500 stocks? We can answer this question by creating a portfolio with a successful strategy between 1997 and 2015. Every week we select 25 assets from the 500 stocks comprising the index.

The stocks are going to be as correlated as they were in the index (because they are the same assets). But are we investing in the most correlated stocks? And if this is the case, does the high correlation work against performance?

There’s a negative relationship between correlation and performance again. The higher the correlation, the more poor the performance.

PortfolioDispersion

Although there’s this negative relationship, the strategy outperforms the index when the assets are high correlated.

PortfolioAnnuals

In Summary

Although you should pay attention to the correlation between the stocks in your portfolio because it could go against you in down trends, with an effective strategy, you could reduce this damage. So, keep in mind the correlation to invest, although it’s be better when based on a good investing strategy.

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[…] Performance and correlated assets [Quant Dare] It is well known that an efficient portfolio should be comprised by uncorrelated assets. The objective is to cover possible widespread falls of all portfolios assets. But, what actually is the negative effect of investing in correlated assets? Does the correlation benefit at anytime? How often does the correlation work against the earnings? Firstly, we focus on S&P500 in o […]

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