Glossary
Correlation
A statistical measure of how two assets or strategies move in relation to each other.
Correlation ranges from -1 to +1. A value of +1 means two assets move together perfectly, while -1 means they move oppositely. Correlation is essential for portfolio construction because combining uncorrelated strategies reduces overall risk.
Key Points
- Diversification works best when assets have low or negative correlation.
- Correlations can increase during market stress.
- Rolling correlation helps detect regime changes.