Glossary
Correlation
The degree to which two assets' returns move together, on a scale from −1 to +1.
Correlation measures the degree to which two assets' returns move together, on a scale from −1 (perfect inverse) through 0 (independent) to +1 (perfect lockstep). It is the mathematical foundation of portfolio diversification.
A portfolio of assets with low or negative pairwise correlations achieves lower overall volatility for a given expected return — the central insight of modern portfolio theory.
Correlations are unstable: they tend to rise sharply during crises, just when diversification matters most. The phenomenon is known as correlation breakdown and explains why naive diversification often fails in market stress.