Introduction
When it comes to risk management, investors should look at both correlation and beta to gauge the impact of price changes on their portfolio. Also, we want to diversify across many stocks and industries to eliminate excess risk while maintaining our return objective.
However, traditional investment strategies mistakenly rely on the same products to reduce risk: bonds and stocks. Although bonds (IEF; 7-10y US treasuries) and stocks (SPY) have been negatively correlated with each other for most part of the past decade, the relationship between those two products is far