Diversification possibilities in the Swedish financial markets - A correlation analysis of the returns of stock, bonds and real estate

Abstract

The purpose of this study is to analyse the risk-adjusted returns of Swedish stocks, Swedish fixed income gov.- bonds and real estate return over the last 8 years in combination with the time-varying aspects of the correlation between the asset classes. The method used is a time-series analysis of OMXS30, SWEGOVT115, and SX8600PI. For each of the asset types, an index is calculated, as well as the risk-adjusted returns for Sharpe Ratio and Treynor Ratio. Correlation coefficients for different time periods are also computed. The results show that the correlation remained stable between the OMXS30 and SX8600PI, at approx. 0.7, while the correlation between SWEGOVT115 and OMXS30, and SX8600PI fluctuated wildly with a yearly average of approx. -0.25 and -0.2 respectively. Increased exposure towards the bond market could have provided increased risk-adjusted returns for the stock-portfolio, and the real estate market provided the higher overall returns.