Correlations range from -1 (move opposite) to +1 (move together). Lower correlations between your holdings improve diversification.
Formula
ρᵢⱼ = Cov(Rᵢ, Rⱼ) / (σᵢ × σⱼ)Methodology
Correlation measures the strength and direction of the linear relationship between two variables. For sectors:
High correlation (0.7-1.0): - Technology & Consumer Cyclical: 0.7 - Financials & Industrials: 0.6
Moderate correlation (0.4-0.6): - Technology & Financials: 0.6 - Healthcare & Consumer Defensive: 0.5
Lower correlation (0.2-0.4): - Technology & Energy: 0.3 - Healthcare & Energy: 0.2
For portfolio construction, lower correlations between holdings are desirable - they provide diversification benefits. The correlation matrix is used in: 1. Portfolio variance calculation 2. Risk contribution analysis 3. Regime-adjusted stress testing
Data Source
Pre-computed sector correlation matrix based on historical S&P 500 sector index data. Individual stock correlations approximated by their sector.
Reference
Pearson, K. (1896). Mathematical Contributions to the Theory of Evolution. III. Regression, Heredity, and Panmixia. Philosophical Transactions of the Royal Society A, 187, 253-318
Limitations
Uses sector-level correlations as proxies for individual stocks. Correlations are estimated from historical data and may change, especially during market stress.
Related Metrics
Check Your Correlations
See how your holdings move together and find diversification opportunities.
For Educational Purposes Only
This analysis is not investment advice. Results are based on simplified models using historical data. Past performance does not guarantee future results. All investments carry risk of loss. Consult a qualified financial advisor before making investment decisions.