For this demonstration (see Table 2.1)

For this demonstration (see Table 2.1) we used a portfolio of
55 percent stocks (from the S&P 500); 30 percent bonds (using
the Lehman Aggregate bond index); 10 percent commodities (using
the Goldman Sachs Commodity Index or GSCI Total Return,
which includes crude oil, natural gas, copper, gold, wheat, coffee,
live cattle, and lean hogs among its commodities); and 5 percent
cash (using a 30-day Treasury bill).

United States compared strong correlation

A one (1) means a strong correlation in the same direction,
while a minus one (–1) means a strong correlation in the opposite
direction. A zero (0) means no correlation. In the analysis here we
are being conservative, using five-year, or 60-month, rolling correlations.
This means that each monthly correlation reading includes
five years of returns from the United States compared to
five years of monthly returns of a foreign market or markets. This
smooths out a lot of the noise

S&P 500 In 2003

The result of diversification is not always a smaller loss. It can
be a smaller gain. In 2003, the year the stock market began its recovery
from the 2000 crash, the S&P 500 had a total return of
28.7 percent while the return for the Russell 2000 was a stunning
47.3 percent. The combined return was 38 percent.

Lack of correlation

In statistical terms, you are looking for a lack of correlation
in picking the investments in your portfolio. Among your stocks,
you look for equity groups or sectors that tend to move in different
directions—for example, by buying both the blue chips in the
Standard & Poor’s 500 stock index and the often unheard-of
smaller-cap stocks that are in the Russell 2000 Index.