Portfolio Correlation Definition
Portfolio Correlation measures the degree that each investment in a portfolio moves relative to another investment within the portfolio.
How we Calculate Portfolio Correlation
Within a portfolio, investments are correlated against each other, as opposed to a benchmark. Therefore, we use two different formulas, depending on what we are calculating the Correlation of.
To see how we calculate Benchmark Correlation, click here.
The formula we use to calculate Portfolio Correlation is:
We use treasury bills for our risk free rate. To learn more, please click here.
Correlation Matrix
In order to visualize the Correlation within a portfolio, the standard is to use a matrix. This helps identify multiple funds within a portfolio that are highly correlated. An example is below: