Portfolio Construction

The Stock/Bond Correlation

Drivers and Implications

Topics - Portfolio Construction Portfolio Risk and Performance Asset Allocation Equities Fixed Income Alternative Investing

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The Stock/Bond Correlation

The relationship between stock and bond returns is a fundamental determinant of risk in traditional portfolios. For the past two decades the stock/bond correlation has been consistently negative, and investors have largely been able to rely on their bond investments for protection when equities sell off. But this hasn’t always been the case, and macroeconomic changes – such as higher inflation uncertainty – could lead to a reappearance of the positive stock/bond correlation of the ‘70s, ‘80s and ‘90s. This would have broad implications for investors, either increasing portfolio risk or forcing allocation changes likely to reduce expected returns. 

In this article we set out practical steps to prepare for such an outcome: first, understanding the drivers and implications of this ‘golden parameter’ before it loses its luster, and second, revisiting alternatives – which could play a crucial investment role in a positive stock/bond correlation world.


About the Portfolio Solutions Group
The Portfolio Solutions Group (PSG) provides thought leadership to the broader investment community and custom analyses to help AQR clients achieve better portfolio outcomes.

We thank Alfie Brixton, Jordan Brooks, Pete Hecht, Antti Ilmanen, Thomas Maloney and Nick McQuinn for their work on this paper. We also thank Jim Cavanaugh for helpful comments.


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