Overlapping Correlation Coefficient

Paolo Tasca

Working Papers from ETH Zurich, Chair of Systems Design

Abstract: This paper provides a mapping from portfolio risk diversification into the pairwise correlation between portfolios. In a finite market of uncorrelated assets, portfolio risk is reduced by increasing diversification. However, higher the diversification level, the greater is the overlap between portfolios. The overlap, in turn, leads to greater correlation between portfolios.

Keywords: diversification; overlapping portfolios; correlation (search for similar items in EconPapers)
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