Correlations among Utilities, Telecoms, BDCs and Financials

May 25, 2011 10:48 AM ET

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Correlations among Utilities, Telecoms, BDCs and Financials

pc35

Diversity within a portfolio is thought to reduce risk. One measure of diversity is price-correlation and well-correlated portfolio elements decrease diversity. Here is presented a price-correlation matrix based on a portfolio of four utilities, three telecoms, two BDCs and two Financials with Market Caps ranging from $300m to $180b. Members of each group were chosen to span the group’s Market Cap. The correlations are computed for weekly price data covering 15 April 2010 to 15 April 2011. Data taken from Yahoo Financial.

apr10:apr11	POR	DUK	POM	UIL	T	VZ	FTR	TICC	ARCC	TWO	NLY
POR 1.94B		0.83	0.75	0.84	0.86	0.96	0.55	0.81	0.89	0.93	0.39
DUK 0.303			0.91	0.73	0.91	0.85	0.54	0.84	0.83	0.72	0.53
POM 4.50				0.69	0.89	0.78	0.61	0.82	0.84	0.67	0.58
UIL 1.69					0.78	0.83	0.70	0.72	0.91	0.81	0.23
T 183						0.90	0.61	0.78	0.88	0.74	0.49
VZ 104	+	+	+	+	+	+	0.64	0.87	0.88	0.91	0.43
FTR 8.63								0.76	0.68	0.60	0.44
TICC 0.324									0.80	0.83	0.55
ARCC 3.41										0.86	0.43
TWO 0.396											0.42
NLY 14.6B											1.00

The symmetric correlation function produces a symmetric matrix. Column 1 lists the portfolio members with each respective Market Cap in billion$.

If we arbitrarily say that correlation values above 0.73 represent “well-correlated” prices and values below 0.6 represent “ill-correlated” prices, several implications may be drawn regarding the members presented here:

1: NLY is the best ill-correlated entity in the group studied, with FTR second best.

2: The two Financial members (TWO and NLY) are ill-correlated (0.42)

3: The two BDCs (TICC and ARCC) are well-correlated (0.80).

4: The two major telecoms are well correlated but not well-correlated with (smaller) FTR.

5: All utilities are well correlated.

Item 2 indicates that large and small entities within the Financial-family may be ill-correlated; further study of this implication seems warranted.

Disclosure: I am long for all portfolio members except DUK and POM.

Disclosure: I am long POR, UIL, T, VZ, FTR, TICC, ARCC, TWO, NLY.

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