The Eye of the Recession's Storm - Robert Kiyosaki (aka, Rich Dad Poor Dad)

Haha, that'd be interesting. Correlation is direction and relative size. So if China goes 6, 10, 8, then we are 100% correlated if we go 3, 5, 4.

That doesn't make sense. So if China goes 6, 10, 8 we're 100% correlated whether we go 3, 5, 4 or 1.5, 2.5, 2? So what's the point of that stat?
 
That doesn't make sense. So if China goes 6, 10, 8 we're 100% correlated whether we go 3, 5, 4 or 1.5, 2.5, 2? So what's the point of that stat?

At 0.98 there is extremely high likelyhood that one is the cause and the other is effect. Which is why the ratio of movement isn't important.

Correlated could be like subject & shadow. If shadow is twice size then it moves twice as much.

If you want same effect between Aus and China, invest twice as much in Aus.
 
You had me up until the last sentence??

:confused:

Fair enough, let's forget about Aus/China. One traders strategy is called Pairs Trading. You follow highly correlated Pairs of stocks, maybe BHP/Rio, though I'm not sure how correlated these are.

On occassion the two will move apart quite a bit, maybe one doesn't move up as fast as the other. So you short the expensive one and buy the cheaper one. You then have complete market protection and ore only betting that they come back together.

However you need to bear in mind that one may be more volatile than the other, and therefore generally move more. So you do two things, your correlation index of the pair is normalised for volatility. And when you place a position they will be for different dollar amounts, in line with the difference in volatility. So if BHP is twice as volatile as Rio, you'll have half the position size, because you're not betting that their volatility difference will change.

One reason two similar entities might exhibit different volatility is different levels of debt. Hope I'm not too long winded, it's harder to shorten it :eek:
 
Thanks the explanation.

But just so I'm sure, I understand; as I understood the 1st post in this vein, it is Aust shadowing China, yes?

In which case; invest 2ce as much in Aus. because the Aus. shadow is 1/2 (obviously a lot less than 1/2 - but for the purpose of explanation of the posts as presented) the size of the Chinese 'shadowed' economy?

'Zat about right?
 
Thanks the explanation.

But just so I'm sure, I understand; as I understood the 1st post in this vein, it is Aust shadowing China, yes?

In which case; invest 2ce as much in Aus. because the Aus. shadow is 1/2 (obviously a lot less than 1/2 - but for the purpose of explanation of the posts as presented) the size of the Chinese 'shadowed' economy?

'Zat about right?

Haha, well what I was really on about was that China seems more volatile than Aus, so invest less in China as the risk is higher. It's not so much that one shadows but that one is more volatile. But that was really just my gag about the difference between correlation vs volatility.
 
Back
Top