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Overlapping Correlation Coefficient

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  • Paolo Tasca

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.

Suggested Citation

  • Paolo Tasca, "undated". "Overlapping Correlation Coefficient," Working Papers ETH-RC-13-004, ETH Zurich, Chair of Systems Design.
    • Handle: RePEc:stz:wpaper:eth-rc-13-004
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    References listed on IDEAS

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    Cited by:

    1. Tasca, Paolo & Mavrodiev, Pavlin & Schweitzer, Frank, 2014. "Quantifying the impact of leveraging and diversification on systemic risk," Journal of Financial Stability, Elsevier, vol. 15(C), pages 43-52.

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