Measure the extent to which price movements of two or more assets or variables are interrelated.
In the Correlations lens, you can compare various investments to a give selected Benchmarks using Correlation coefficients (X Axis) and you can analyze their respective Net IRR (Y Axis) as well.
Correlation measures the extent to which the price movements of two or more assets or variables are interrelated. A correlation coefficient of 1 indicates a perfect positive correlation, -1 implies a perfect negative correlation, and 0 suggests no linear correlation between the variables.
How to Calculate Correlation:
In the Correlations lens, returns are calculated on a monthly basis for a total of 12 periods (represented by n). For each period, the Benchmarks mean returns (Xˉ) for the 12 periods is subtracted from the period return (Xi) and then divided by the Standard Deviation (σX). This is then multiplied by the same calculation but for the Asset returns. The sum of these 12 periods is then added together and divided by n-1 which is 11 in this case.
Correlation will always be between -1.0 and 1.0. A negative correlation implies that the asset does well when the benchmark does poorly and a positive correlation means the Asset does well when the benchmark does well. Correlation does not denote that the two Assets have similar magnitudes of returns but rather it measures that they move in sync.
Net IRR: Net IRR evaluates the annualized rate of return on an investment, considering both the timing and size of cash flows. Net IRR is very similar to CAGR; however, Net IRR accounts for irregular cash flows and accounts for fees.
How to Calculate
- Divide the Future Value (FV) by the Present Value (PV)
- Raise FV/PV to the Inverse Power of the Number of Periods (1 ÷ Number of Periods)
- Subtract by One to get the IRR
Here we have Correlation on the Y Axis and Net IRR on the X Axis. You may select the Benchmark in the box in the top corner. Furthermore, you can also filter by Entity in the Filter (All) box.
QQQ Example
The correlation between QQQ and the S&P 500 is very high at 0.92. This indicates that QQQ typically moves in sync with the S&P 500. Given that QQQ is an ETF, this correlation is not surprising. QQQ also has a a Last twelve months Net IRR of 46.49% and a Net IRR of 15.77%. This is an exceptionally high return!
Remember, Correlation measures the degree to which two assets move in relation to each other, but it does not provide information about the magnitude of those movements. Additionally, by clicking on the security, users have the opportunity to access further details such as Total Gain Loss and Asset Tags
BABA Example
By examining the data, it is evident that Ali Baba has exhibited a weak correlation over the past twelve months and a significantly low Net IRR.