Cluster Analysis

DEFINITION of 'Cluster Analysis'

An investment approach that places securities into groups based on the correlation found among their returns. Securities with high positive correlations are grouped together and segregated from those with negative correlation. Between each cluster, very little correlation should exist. Holding stocks in each cluster provides the investor with a diversified portfolio.

BREAKING DOWN 'Cluster Analysis'

Cluster analysis enables the investor to eliminate any overlap in his or her portfolio by identifying securities with related returns. This approach increases diversification, which provides the investor will a less risky portfolio. Cluster analysis has uncovered certain categories of stocks, such as cyclical and growth stocks.

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RELATED FAQS
  1. What is a common strategy traders implement when using Fibonacci Clusters?

    Learn common trading strategies traders use for trading with Fibonacci clusters to be able to enter a market at a very advantageous ... Read Answer >>
  2. Does a negative correlation between two stocks mean anything?

    Learn what the concept of negative correlation means, understand how it is generally calculated and see how it is used in ... Read Answer >>
  3. How do fund managers use correlation to create portfolio diversity?

    Read about how contemporary investment fund managers use the concept of correlation to add diversification among assets in ... Read Answer >>
  4. How do I find positive correlation in the stock market?

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  5. How do I use Fibonacci Clusters for creating a forex trading strategy?

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