We recently had a question about using correlation among asset classes within an investment portfolio. The functions to put this together all exist, but it can be somewhat confusing - particularly using the correlated value functions.

We’re posting a cleaned-up version of that example here. Basically, it’s a model of an investment portfolio that includes correlation among various asset classes to determine periodic returns.

This example is oversimplified. Among other things, inflation and costs are omitted. Also note that the portfolio is rebalanced in each period (weights in each period always reflect the portfolio targets). Nevertheless, this may be useful in understanding how to apply the correlated return functions.

File: Correlated Asset Portfolio Example

If you have any questions about the model or would like help undestanding the example, please send us an email.