Blessed Correlation. Damned Correlation.

The concept of correlation and Daniele Bernardi’s vision. Everyone knows the concept of correlation, and everyone has surely seen a Cartesian plan where two funds are depicted growing over the long term, while in the short term are inversely related to each other as seen on the image above (on today‚Äôs post). In 2009 I took part in a Risk Management course in London organized by Paul Wilmott (who also recently attended an annual conference of mine in Venice, www.quant.it) and Nicolas Taleb, author of best sellers Fooled by Randomness, and The Black Swan. Nicolas Taleb showed me (for the first time in my life) a graph like this: The correlation is negative in this case as well, but the funds are going down (following the same principle for which they should rise in the previous image). This second image opened my eyes to how much we tend to overestimate

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