What is Correlation?
Correlation measures how closely two assets move in relation to each other, ranging from -1 (perfect inverse) to +1 (perfect parallel). Zero correlation means no relationship.
Correlation Explained
Understanding correlation is key to effective diversification. If all your positions are highly correlated (like tech stocks), they'll all move together — you're not truly diversified. Holding assets with low or negative correlation smooths returns. During market stress, correlations tend to increase (everything drops together), which is when true diversification matters most.
Real-World Example
Gold typically has a low or negative correlation to stocks. When stocks crash, gold often rises as investors seek safety. Holding both stocks and gold in a portfolio reduces overall volatility compared to holding stocks alone.
Related Terms
Build Discipline Around Correlation
Understanding Correlation is one thing. Applying it consistently is where most traders fail. Ivern AI helps you build the daily habits to actually use what you know.
Start Building Discipline — Free