Wednesday, September 9, 2015

Correlation With Apple

A recent article discusses the correlation that various stocks have with Apple and some of the stocks are surprising. For example, industrial products manufacturer Illinois Tool Works (ITW) has the highest correlation at .61. Payment technology firm Fiserv and Honeywell have the next highest correlations with Apple. Facebook and Texas Instruments also have high correlations with Apple, which is expected since Facebook is a tech stock and Texas Instruments is a major supplier to Apple. By now, we hope you understand how important correlation is to diversification, but, as with most numbers, we need to apply economic rationale to the numbers. There is no reason that ITW and Fiserv should have such high correlations with Apple, and in the future, these correlations will likely fall. Remember, what we really want is the correlations going forward, not correlations in the past. As Eric Chemi, the author of the article, states in the accompanying video: "That's where the data can get you and I think people need to be careful to not get trapped in these types of numbers."