Portfolio Risk & Return

Correlation

How closely two holdings move together, on a scale from −1 to +1. At +1 they rise and fall in lockstep; at 0 their moves are unrelated; at −1 one tends to rise when the other falls. Correlation is what makes diversification work or fail: combining holdings with low correlation smooths a portfolio’s ride, because their bad days tend not to coincide, while holdings that are highly correlated add up to one big bet however many there are. Two broad US stock funds, for example, often correlate above 0.9. The catch: correlations are measured from the past and they shift — in a market panic many of them jump toward +1 at exactly the moment diversification is needed most.

Educational information, not investment advice. See it applied across the screener →