How To Use Asset Correlations To Boost Return And Cut Risk

Summary

• Modern portfolio theory emphasizes investing in uncorrelated assets to earn higher returns for a given level of risk.
• At current yields, bonds should offer returns that aren't highly correlated to stocks, making an old move new for better risk-adjusted returns.
• Moreover, understanding correlations can help investors reduce risk and find value in different asset classes and sectors within the stock market.
• Businesses like Walmart and the global tobacco industry aren't highly correlated with the rest of the market, making them useful investments.
• Weird day-to-day correlations in stocks related to media narratives like Ozempic or COVID-19 can help value investors find opportunities.

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Modern portfolio theory holds that if you can diversify your portfolio between uncorrelated assets with positive expected returns, you'll earn a higher return for any given level of risk. For example, if you have two assets that have

Analyst’s Disclosure:I/we have a beneficial long position in the shares of PM, MO, WMT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.