Correlation measures how assets move relative to each other and is central to real diversification.
Correlation captures how two return series move together. It ranges from -1 (move opposite) to +1 (move together). A portfolio’s correlation structure largely determines whether diversification is real or cosmetic.
Correlation = Covariance(A,B) ÷ (StdDev(A) × StdDev(B))Correlation FAQs
Correlation is not a constant. It changes as macro drivers, liquidity, positioning, and risk appetite change. In stress periods, many assets share common drivers and correlations tend to rise.
No. An asset can be uncorrelated and still be very volatile. Correlation helps with diversification; it does not replace volatility and drawdown analysis.
Use it to detect hidden concentration. Combine correlation clusters with position sizing and risk budgets so your portfolio is not dominated by one underlying driver.