Quiz Question: Correlate the Asset Classes

Rank the following from 1 to 4 in terms of correlation with U.S. equities. Let “1” be most correlated, and “4” be least. The actual correlations can be seen by dragging your cursor after the colon in each line below:

  • Non-U.S. equities: 0.71 (Rank 2)

  • U.S. bonds: 0.20 (Rank 4)
  • Real estate: 0.59 (Rank 3)
  • Private equity: 0.90 (Rank 1)

Surprised? I know i was.

Source: Ennis Knupp


  1. Why are you suprised? Our assumtions have always been close to this. Anyone that’s invested in this asset class for any period of time knows that the correlations for PE have always been significantly understated because of stale pricing data and other structural issues.

  2. Well, I overstated the case somewhat. While I knew there was a high correlation between PE and U.S. equities, a) I had forgotten how high it was, and b) was somewhat surprised that non-U.S. equities weren’t more highly correlated than they were.

  3. This begs the question; why would anyone looking for diversification invest in private equity?

  4. Right, that was sort of my point. Many naive sorts diversify into PE thinking that it is an uncorrelated asset class. It isn’t.
    What’s worse, even what small amount of uncorrelation as exists precisely when you most want to have it — in crises, all correlations go to 1.0 ….