Creating a Diversified Portfolio with Correlation Matrix in Python
A must-know process for all people investing in the equity market
Introduction
Investment in tradeable assets is not only done by institutional or professional traders but also by common people who aim to earn side income on a long-term basis. The first group of traders who are professionals and institutional traders love to make a hefty amount of money out of the market and hence take huge risks (like do or die situations). The second group who are common people is contrary in nature to the first one. Their aim is not to make fortunes in no time but a steady assured income that grows gradually over time. Importantly, they hate risks and love constant income.
To satisfy these two conditions at the same time, investors coined the term portfolio diversification. To define this concept, it is the process of holding a diversified number of stocks in one’s portfolio which ultimately reduces the risk and increases the certainty of constant income.
The stocks that are comprised in a diversified portfolio are not chosen randomly but instead, certain steps or approaches are followed. In this article, we are going to follow a statistical approach which is using the correlation matrix to pick the right stocks to hold…
