Correlation Analysis
Climate, economic, geographic correlation and diversification benefits.
What This Means for You
When one loan fails, do others fail too? We map how your loans move together—by geography, hazard type, and economy—so you can diversify in the right places and cut systemic risk.
How It Works
Estimate peril-linked co-movements across ZIPs and sectors (climate, economic, geographic).
Compute total correlation risk and diversification benefit scores.
Key Capabilities
When You'll See Results
Reviewed quarterly; rebalance recommendations issued quarterly.
Technical Details
Formulas
Climate Correlation = min(0.8, (10 - CLIMA Score) / 10 × 0.9)
Economic Correlation = min(0.6, (10 - CLIMA Score) / 10 × 0.7)
Geographic Correlation = min(0.5, (10 - CLIMA Score) / 10 × 0.6)
Total Correlation Risk = weighted average of all correlations
Diversification Benefit = max(0.3, 1 - Total Correlation Risk)
Portfolio Variance = Σ(Weight² × Variance) + Σ(Weight × Weight × Correlation × StdDev × StdDev)
Risk Reduction = Baseline Portfolio Risk × (1 - Diversification Benefit)
RAROC Improvement = (Net Income / Economic Capital) × Diversification Benefit Multiplier
Example
Portfolio with 60% in high-correlation ZIPs (CLIMA Score 3.0 average)
Climate Correlation = (10 - 3.0) / 10 × 0.9
0.63
Economic Correlation = (10 - 3.0) / 10 × 0.7
0.49
Geographic Correlation = (10 - 3.0) / 10 × 0.6
0.42
Total Correlation Risk = (0.63 + 0.49 + 0.42) / 3
0.51
Diversification Benefit = 1 - 0.51
0.49
Portfolio Risk (before)
15% volatility
Portfolio Risk (after rebalancing) = 15% × (1 - 0.49)
7.65%
Risk Reduction = 15% - 7.65%
7.35 percentage points
Capital Requirement Reduction = 7.35% × $100M × 10%
$735k
RAROC Improvement = 12% × 1.49
17.88% (49% improvement)
Ready to Get Started?
Upload your portfolio or schedule a demo to see Correlation Analysis in action.