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.
Next Up
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.
RELATED TERMS

Correlation
In the world of finance, a statistical measure of how two securities ... 
Negative Correlation
A relationship between two variables in which one variable increases ... 
Inverse Correlation
A contrary relationship between two variables such that they ... 
Positive Correlation
A relationship between two variables in which both variables ... 
Fibonacci Clusters
A tool used in technical analysis that combines various numbers ... 
Benchmark For Correlation Values
A benchmark or point of reference chosen by an investment fund ...
Related Articles

Products and Investments
4 Reasons Why Market Correlation Matters
Learn about how correlation can be used to measure how broader markets move in relation to each other. See how correlation is used to manage risk. 
Investing
Correlation
In the world of finance, correlation is a statistical measure of how two securities move in relation to each other. 
Trading Strategies
Is the Stock Correlation Strategy Effective?
The synchronized movement among stocks and markets in recent years is challenging diversification. 
Trading Strategies
Pairs Trading: Correlation
Correlation is a term from linear regression analysis that describes the strength of the relationship between a dependent variable and an independent variable. Central to pairs trading is the ... 
Economics
Understanding the Oil & Gas Price Correlation
Learn how the correlation between the commodity prices for natural gas and oil changed from 2004 to 2015 due to increased natural gas production. 
Forex Education
GBP/USD: Trading The "Cable"
Known as "trading the cable", this pairing has its advantages. 
Forex Education
EUR/USD
Trading the euro with the U.S. dollar has many advantages due to its correlation with other currencies. 
Forex Education
AUD/USD: Trading The "Aussie"
Forex traders like "trading the Aussie" in large amounts. 
Investing Basics
Portfolio Diversification, Done Right
Diversifying your portfolio by means of different securities and asset classes is an essential approach to lower the overall risk of a portfolio. 
Investing Basics
Diversification Beyond Stocks
If you think holding several stocks means you're diversified, think again  there's much more to be done to reduce portfolio risk.
RELATED FAQS

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 >> 
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 >> 
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 >> 
How do I find positive correlation in the stock market?
Learn how positive correlation is found in the stock market, how correlation is calculated and how positive correlation is ... Read Answer >> 
How do I use Fibonacci Clusters for creating a forex trading strategy?
Find out how traders in the forex market can implement Fibonacci cluster analysis with their currency pairs to identify areas ... Read Answer >> 
How is correlation used differently in finance and economics?
Take a look at the similarities and differences between how statistical correlation is applied in economics as opposed to ... Read Answer >>