Portfolio Diversification: Correlation Risk Management with Python

• Understanding the importance of diversification and a portfolio of uncorrelated returns, I plotted the 5-year returns of several equities, ETFs, and commodities against SPY.
• I also used linear regression to calculate the beta and correlation, and generated a correlation matrix and a heatmap.

Procedure

• Imported 5-Year adjusted closing prices of my stock investments using Yahoo Finance
• Extracted percent change using NumPy
• Used linear regression to calculate slope (beta) and correlation
• Plotted % returns and linear regression line
• Created a correlation matrix and heatmap

Screenshot of Maxtrix and heatmap Generated

Inspiration

• David Ng, Professor of Finance, Cornell University - Taught my Finance Analytics Class
• Principles by Ray Dalio
• Ray Dalio Breaks Down His Holy Grail
• YT Tutorial: Calculating the Correlations Between Stocks Using Python by Kevin Mooney

Libraries Used

• Matplotlib
• NumPy
• Pandas
• SciPy
• Seaborn