Correlation

Correlation is a measure of the strength of the relationship between an
investment and a benchmark. This benchmark is commonly the S&P 500, but Fund Manager
allows you to assign any investment as the benchmark. See the
Benchmark Dialog. A benchmark
must be assigned before correlation calculations can be made.

(In addition to this Custom Report field calculating the correlation relative
to a benchmark investment, a Correlation
Matrix Report is also available that calculates correlation of monthly
returns between groups (asset type, investment goal, sector, investment type, or
currency).)

The correlation coefficient can vary between -1 and 1. A value of 1
indicates the investment and benchmark are perfectly matched. A value of
-1 indicates they are perfectly matched, but in a negative manner (when one goes
up, the other will go down with the same strength). A value of 0 indicates
there is no relationship between the investment and benchmark.

#### Calculation Details:

When calculating the correlation coefficient of an investment the simple monthly returns over
the specified comparison period are
calculated. The simple monthly return is:

Return = (End_price + Dist_per_share - Start_price) / Start_price

The returns for both the investment and benchmark are calculated. If
the comparison period is 5 years, there are 60 monthly returns for each the
investment and the benchmark. The correlation of these returns is
calculated using the formula:

where '*n*' is the
number of data points (60 in this example), and '*x*'
are the benchmark returns, and '*y*'
are the investment returns. When calculating returns your current
interpolation range preferences are used.
If sufficient pricing data is not available the correlation will not be
reported.

The correlation coefficient for a portfolio, asset type, goal, or investment
type is determined by calculating returns from a weighted average of the
investments in that group. The weighting is based on the ending value.

#### Advanced:

Fund Manager can output the data points used in this calculation to a log
file. By default the logging feature is turned off. To turn it on,
create a new registry string value at:

HKEY_CURRENT_USER\Software\Beiley Software\Fund Manager\CurrentVersion\techanal

named "benchmarklog" and set it to a value of "1". The log file is
named "stats_log.txt", and will be located in your user's AppData\Roaming\Fund Manager
folder (usually a hidden folder). This log file is deleted upon exiting
Fund Manager.

### See Also

Correlation Matrix Report

Benchmark Dialog

Custom Report

Alpha Calculation

Beta Calculation

Sharpe Ratio

R-Squared

Standard Deviation of Returns