First: I do not want to change my investing strategy (VT buy & hold). But I would like to understand more about stocks volatility, correlation and (potential, theoretical) portfolio improvement. And maybe use it for my fun fund only.
As i was searching for ideas for my fun fund i compared QQQ vs XBI. According to M*:
The way i understand it:
- QQQ and XBI had (almost) the same return (starting and ending point are together): positive correlation of 1 for the period?
- XBI was more volatile than QQQ (more swings)
So case study over last 10y, investing at the very same moment:
- Case A: invest every month 100 usd only in qqq
- Case B: invest every month 100 uds only in xbi
- Case C: invest every month 50 usd in qqq and 50 usd in xbi without rebalancing btw them
- Case D: Case C but with rebalancing
Is it correct to say that at the end, case D would have the best return and case A-B-C would have the same return?
So would it be in general beneficial (highest potential return, highest risk) to couple 2 sectors with the highest correlation but with very different volatiilty?
And what about to couple 2 sectors with the lowest correlation? For example Info Tech with Utilities:
Does this combination reduces the risk (more than it reduces the return)?
EDIT: choice xbi vs qqq was random / results are (i suppose) just luck; prospective it will not do it again.