In portfolio management, the term “correlation” has been mentioned many times as its very characteristic formed the basis of diversification among the asset classes. For those who are new to investing, correlation is “a statistical measure that determines how assets move in relation to each other”1. As the various asset classes behave differently during differing market and economic conditions, their relative price movements with one another would be different given a set period or snapshot of time.
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However, there has been a notion that correlation in terms of price and returns is a zero-sum game. For example, in a portfolio consisting of two asset classes (let us call them A and B) and they are negatively correlated with each other, the assumption is that if the price of A rises, the price of B would drop, vice versa. Yes, that is correct, but only half; the...
