Understanding Negative Correlation

This page demonstrates an example of what “Perfect” Negative Correlation would look like if it existed. The example return 1 represented by the blue line and the example return 2 represented by the red line demonstrate how two returns with significant fluctuation can yield a composite return represented by the black line with no standard deviation.

The above is for educational purposes only and does not represent actual returns.

This graph demonstrates actual negative correlation between one part US Small Cap Value and one part International Growth. Notice that very often when the blue line is up the green line is down and vice versa. There is the notable exception of 1990. Also notice that US Small cap value has five down periods, International Growth has four down periods, but the Correlation Mix only has three down periods, and two have been greatly minimized. The Correlation Mix was more stable (lower standard deviation) than either asset class. Standard Deviation measures the likelihood of fluctuation by certain amounts. In this case the likelihood of fluctuation for the mix was nearly 25% less than US small Cap Value alone and over 20% less than International Growth alone.

The above represents the named asset classes for the specified time period as per the CRSP securities data files for US Small Cap Value and MSCI securities data for International Growth. It is intended for educational purposes only. Past performance may not be indicative of future results.