The Correlation Conundrum and What to Do About It: With the rise in correlations, diversification is more important than ever

The Correlation Conundrum and What to Do About It: With the rise in correlations, diversification is more important than ever

Over the past two decades, the amount of equity assets invested passively has increased from roughly 10% in 1993 to about 30% today. At the same time, correlations between individual stocks have generally risen. Let’s take the S&P 500 as an example: Based on the average daily correlation over the trailing six months, correlations have risen from roughly 10% in 1994 to 66% at the end of 2011