Risk and correlation

The covariance matrix

Risk and correlation plays an important role in portfolio construction. We use a factor approach to build our covariance matrix. This approach produces an internally consistent covariance matrix with fewer assumptions than needed for directly estimating volatilities and pair-wise correlations. 1

We expect equity market volatility generally to increase from the low levels seen prior to the fourth quarter of 2018. After spiking with the GFC, volatility declined substantially into 2017. As seen the in the next chart, equity volatility reached mid-single digit ranges and has started to rapidly increase. We would not be surprised to see further increases in the short run as trade issues and geopolitical risks remain elevated. We also note the realized volatility of the 10-year Treasury return is below its average and we expect this to become more elevated in the future.

Historic volatility: 1997-2019 - S&P 500 and 10-yr Treasury S&P 500 and 10-year Treasury

Source: S&P, Bloomberg Barclays, Morningstar Direct. Data as of 30 June 2019.

Historic stock-bond correlation: 1997-2019

Source: S&P, Bloomberg Barclays, Morningstar Direct. Data as of 30 June 2019.

Important legal information

To proceed, please confirm that you are a professional / qualified / institutional client and investor.

Views and opinions expressed are presented for informational purposes only and are a reflection of UBS Asset Management’s best judgment at the time a report or other content was compiled. UBS specifically prohibits the redistribution or reproduction of this material in whole or in part without the prior written permission of UBS and UBS accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions contained in the content of this webpage have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith but no responsibility is accepted for any errors or omissions. All such information and opinions are subject to change without notice but any obligation to update or alter forward-looking statement as a result of new information, future events, or otherwise is disclaimed. Source for all data/charts, if not stated otherwise: UBS Asset Management.
Any market or investment views expressed are not intended to be investment research. Materials have not been prepared to address requirements designed to promote the independence of investment research and are not subject to any prohibition on dealing ahead of the dissemination of investment research. The information contained in this webpage does not constitute a distribution, nor should it be considered a recommendation to purchase or sell any particular security or fund. The materials and content provided will not constitute investment advice and should not be relied upon as the basis for investment decisions. As individual situations may differ, clients should seek independent professional tax, legal, accounting or other specialist advisors as to the legal and tax implication of investing. Plan fiduciaries should determine whether an investment program is prudent in light of a plan's own circumstances and overall portfolio. A number of the comments in the content of this webpage are considered forward-looking statements. Actual future results, however, may vary materially. Past performance is no guarantee of future results. Potential for profit is accompanied by possibility of loss. 
© UBS 2020 The key symbol and UBS are among the registered and unregistered trademarks of UBS.

Reset