Risk warning on volatility and correlations

When volatility and correlations spike together, portfolio managers should simulate realistic stresses and be prepared to deal with the additional risks, warns Investor Analytics

It is well known that both volatility and correlation play a role in the riskiness of financial portfolios: higher volatility and/or higher correlations between investments both increase risk. Conversely, if either of these two drops, the portfolio risk also drops. From a return and risk perspective the current low correlation environment has been a boon to stock-pickers, as we pointed out in our November article. But such situations – when both volatility and correlations are in the low to