Rixtrema: How Correlations Can Hurt Your Portfolio, Making Stress Test Results Realistic

Most firms that use traditional risk models are actually led to diversify the upside risk and not the downside risk, an exact opposite of what is desired. Concept of correlation is used by anyone participating in financial markets. It is especially important for investment professionals that use risk models. The concept itself is simple, but getting the correlation right is an exceedingly difficult exercise. We show how traditional methods of estimating correlations as an average lead