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 ... 
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 ... 
Correlation Coefficient
A measure that determines the degree to which two variable's ... 
Serial Correlation
The relationship between a given variable and itself over various ...
Related Articles

Investing
Correlation
In the world of finance, correlation is a statistical measure of how two securities move in relation to each other. 
Personal Finance
Could Higher Correlations Wreck Your Diversification Strategy?
Rising asset correlations could make your portfolio riskier than you think. 
Trading Strategies
Is the Stock Correlation Strategy Effective?
The synchronized movement among stocks and markets in recent years is challenging diversification. 
Forex Education
How To Trade Currency And Commodity Correlations
Relationships between currencies and commodities exist throughout the financial markets. Find out how to trade these trends. 
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. 
Investing Basics
Diversification: Protecting Portfolios From Mass Destruction
This investing strategy retains its charm as a protection against random events in the market. 
Trading Strategies
How to Create a Risk Parity Portfolio
Learn about how risk parity uses leverage to create equal exposure to risk among different asset classes in portfolio construction. 
Forex Education
Managing Currency Exposure In Your Portfolio
The value of your investments is impacted by changes in global currency exchange rates. Find out how. 
Technical Indicators
Explaining Autocorrelation
Autocorrelation is the measure of an internal correlation with a given time series. 
Bonds & Fixed Income
How I Learned to Stop Worrying and Love the Bond
Though U.S. Treasuries are not as expensive as government bonds, U.S. bonds are offering a relatively paltry real return, even after adjusting for low inflation.
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 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 >> 
What level of correlation among investments will guarantee market returns but have ...
Learn how modern portfolio theory uses correlation to determine the efficient frontier for which assets to include in a portfolio ... Read Answer >> 
What types of assets lower portfolio variance?
Learn what type of assets reduce portfolio variance and how modern portfolio theory uses correlation coefficients. Read Answer >> 
How should I interpret a negative correlation?
Learn more about correlation and how businesses analyze variables. Find out how negative correlations are interpreted by ... Read Answer >>