Risk Management

Non-Correlating Assets

1

By diversifying with different stocks in a portfolio, an investor can reduce the levels of unsystematic risk that they are exposed to. To reduce market risk, investors can hold non-correlated assets.

2

Although it is not possible to totally eliminate market risk, holding non-correlating assets, such as bonds, commodities or real estate, can help to minimise market risk. 

3

Non-correlating assets react differently to changes in the markets, compared to stocks. It can often be the case that when the market of one asset type goes down, another will go up.

4

For example, bonds are said to have an inverse relationship with stocks. This means that when stock prices fall, bond prices usually rise. This can help an investor to reduce risk when stock prices fall.

Test your knowledge...

1. How much can you expect to earn from a cash investment?

Copyright © 2021 Methodology

That's wrong - try again!