Volatility and correlation: the missing link

Research decouples risk components

Volatility arrows

Recently, a client asked a question which took us somewhat by surprise: “Can you tell me how much of my portfolio’s risk is due to the volatilities of the securities we invest in and how much is due to their correlations?” Having never heard of a separation of risk into those two factors before, we were taken by the simplicity and power of the idea. We set to work both answering the question and researching if others had tackled it. Interestingly, after discussing with hundreds of market risk pr

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