Weighted Correlation Metrics for Portfolio Diversification

# portfolio diversification tester


# portfolio diversification tester












Are there any online tools (optionally with developer API, to spare me the scraping) that given an existing portfolio, calculate how well a new candidate position would score to increase combined diversification/decrease risk?**

Or perhaps Linux tools that given parameters, can look up historical prices and whatever else they need to for instance return correlation values of individual positions relative to the rest (of that portfolio only, not the broader market or sector)? Beancounter was a great start.

Okay, I realize this may be vague, but I am also open-minded. My goal is to reduce correlations. For example if I already own SPY, then buying IWM (or shorting SDS) would be a poor choice for a new position, as this chart shows.

A tool that computes covariances? of each equity pair in a portfolio, then the combined portfolio variance plus some other aggregate stats based on those, would be nice.

A little bit more background perhaps. Using only very basic investment concepts I have built a process that, at the highest level, uses quantifiable fundamental analysis to screen out the universe of stocks and ETFs. Including market_cap, analyst_recom, average_volume, dividend_yield, P/E, Insider & Inst Own %s, to name a few.

Also daily at a lower level I further filter out candidates using more technical analysis, like short-term RSIs and performances, volatilities, exponential or simple_moving_averages, and average_true_range. (OK some are more for computing trade trigger parameters)

Somewhere in between, I'm looking to introduce criteria that actually considers the rest of the present portfolio and its positions' market values.

I found some websites like Correlation Analysis that take a stock basket to show a correlation matrix and some kind of Intra-portfolio diversification which is key. However that one doesn't factor in number of shares or size of each position.

## Answer by Kyle Balkissoon (score 2)

https://quant.stackexchange.com/a/3043

Maybe I don't get your question well, but what it appears that your goal is to buy securities in order to reduce the correlation between your portfolio constituents.

So firstly you need a metric of diversification.

Something simple you can use, is calculate the correlation matrix, and the weights of each position.

A simple metric would be the sum of (correlation *((size pos 1 + size pos 2) /size(portfolio))

This would give you a sort of weighted average correlation (WAC)

Now you would need to compare previous WAC to new WAC for each potential security and buy only securities that give you a lower WAC.

Another twist if you want to add a dimension of correlation aversion would be the sum of squared correlation (make sure your coefficients are stated as numbers > 0, otherwise they will get smaller! and remember to keep the negative sign at the end (if applicable) so your "diversification effects" are present).

Also remember that correlations are time dependent during market crashes this will increase. So you will need to adjust your sampling window according to your holding period.

## Answer by Mike Dever (score 0)

https://quant.stackexchange.com/a/3050

To address this top-down, what you're really trying to do is achieve consistent returns. The conventional wisdom approach to doing this is to find portfolio constituents that provide diversification and the conventional approach to doing this is to find constituents that have returns that are uncorrelated with each other. But the conventional way of doing this quantitatively leads to low predictability that future returns will match past returns. We did substantial research on this in the late 1980s and the result of that research led us to create portfolios that were balanced and diversified across multiple "return drivers.' This also has the benefit of increasing the probability that your portfolio's returns will achieve a specific target return.

I write about this in my book "Jackass Investing: Don't do it. Profit from it." You can see more at www.JackassInvesting.com"

## Answer by darkpool (score 0)

https://quant.stackexchange.com/a/32794

This is an old question but considering there isn't an accepted answer, I suggest you have a look at DiversifyPortfolio. They provide various tools and visualizations related to correlation and stock portfolio diversification.

They also provide a portfolio allocation tool which takes position sizes and portfolio position correlations into account when determining optimal position sizes.

## Answer by quasar (score -1)

https://quant.stackexchange.com/a/7339

You can calculate correlations, volatility, beta and other statistical metrics for a multi-holdings portfolio on InvestSpy, which is free of charge. For example, analyzing an evenly weighted portfolio of sector ETFs, it's clear that different sectors carry very different levels of risk. At the first glance, Health Care (XLV), Consumer Staples (XLP) and Utilities (XLU) appear to be the best diversifiers, whilst Financials (XLF) and Energy (XLE) - the worst. Similar analysis could be applied at a country level.