JOURNAL OF BUSINESS DIVERSITY

Fooled By Correlation: How Blind Acceptance of Correlation Dogma

Destroys Diversification

Author(s): Jeffry Haber

Citation: Jeffry Haber, (2012) "Fooled By Correlation: How Blind Acceptance of Correlation Dogma Destroys Diversification," Journal of Business Diversity, Vol.12, Iss. 3, pp. 22 - 25

Article Type: Research paper

Publisher: North American Business Press

Abstract:

Ask any quantitative finance academic whether you should use prices (NAVs) or returns when calculating correlations and they will tell you that you can ONLY use returns. Using an example of a hypothetical data set, the correlation of prices is 1.00 and the correlation of the returns derived from these prices is .02. The question for any thinking person is “looking at the two series of data, first for prices and then for returns, do the numbers look extremely correlated (prices) or do they look like they are nearly perfectly random between the two series (returns)?”