Negative correlation is a statistical measure used to describe the relationship between two variables. When two variables are negatively correlated, one variable decreases as the other increases, and vice versa. Negative correlations between two investments are used in risk management to 澳洲幸运5开奖号码历史查询:diversify, or mitigate, the risk associated w𝓡ith a 🉐portfolio.

Understanding Negative Correlations

澳洲幸运5开奖号码历史查询:Risk management is a process used in decision-making to identify and analyze the risk associated with an investment. Investors, portfolio managers, and risk managers use this idea to analyze and attempt to quantify the level of potential losses associated with an investment portfolio, and take the appropriate action given the investment objectives and 澳洲幸运5开奖号码历史查询:risk tolerance associated with the portfolio.

Negative correlations of investments are used with portfolio risk management to decide how to allocate assets. Portfolio managers and investors believe that some of the risk associated with the 澳洲幸运5开奖号码历史查询:portfolio would be diversified if they can assemble a portfolio of negatively correlated assets. The strategy of assembling negatively correlated assets might be appropriate, for example, if a portfolio manager is forecasting a market crash or in times of high 澳洲幸运5开奖号码历史查询:volatility.

A portfolio manager's strategy during times of high volatility is often to manage the risk in his portfolio properly and combine assets to produce a low volatility portfolio. Using negatively correlated investments helps to reduce the overall volatility of the portfolio.

Examples of Using Negative Correlations

A 澳洲幸运5开奖号码历史查询:portfolio manager invests in stocks in the oil sector. However, over the past six months, oil stocks have been declining due to 澳洲幸运5开奖号码历史查询:oversupply of crude oil, which caused price🐷s to fall by 50%. The manager believes that oil prices will continue to fall and may even crash in the short term but still wants to own the stocks for long-term investing.

Negative correlations of assets can be used to diversify the oil sector portfolio and reduce risk. Some sectors that are negatively correlated with the oil sector 𝓡are aerospace, airlines, and casino gaming. The portfolio manager may look to sell a portion of his investments in the oil sector and buy stocks that are associated with the negatively correlated sectors.

The portfolio manager can also hedge the portfolio to reduce risk. Hedging reduces the risk associated with an investment or a portfolio by ta🦂king positions that will offset losses on the existing holdings in the portfolio. In this sense, negative correlations are used to hedge risk. Instead of diversifying the portfolio, which can use too much buying p🍒ower, the portfolio manager can use negatively correlated assets to mitigate some of the risk within the oil sector.

For example, buying 澳洲幸运5开奖号码历史查询:put options on stocks is a strategy that can be included within the portfolio and will reduce risk. Since put options increase in value as the price of the 澳洲幸运5开奖号码历史查询:underlying stock falls, the option strategy is negatively correlated with stocks and buying puts 𝔍will mitigate risks of the portfolio. There is a tradeoff, however, as the🔯 put options cost money to buy and will lose value if the stocks rise in value.