Correlation vs. Trends in Portfolio Management: A Common Misinterpretation

5 Pages Posted: 19 Apr 2011

See all articles by Francois Lhabitant

Francois Lhabitant

Kedge Capital Fund Management; EDHEC Business School

Date Written: April 12, 2011

Abstract

Two common beliefs in finance are that (i) a high positive correlation signals assets moving in the same direction while a high negative correlation signals assets moving in opposite directions; and (ii) the mantra for diversification is to hold assets that are not highly correlated. We explain why both beliefs are not only factually incorrect, but can actually result in large losses in what are perceived to be well diversified portfolios.

Keywords: correlation, trends, diversification

JEL Classification: G10, G11

Suggested Citation

Lhabitant, Francois-Serge, Correlation vs. Trends in Portfolio Management: A Common Misinterpretation (April 12, 2011). Available at SSRN: https://ssrn.com/abstract=1808267 or http://dx.doi.org/10.2139/ssrn.1808267

Francois-Serge Lhabitant (Contact Author)

Kedge Capital Fund Management ( email )

28-30 The Parade
St Helier, JE1 1ZZ
Jersey

HOME PAGE: http://www.lhabitant.net

EDHEC Business School ( email )

393 Prom. des Anglais
Nice, 06200
France

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