What is Correlation?
Correlation measures how two assets move relative to each other — the foundation of diversification. Low or negative correlation reduces portfolio risk.
Formula
Correlation = Covariance(A, B) ÷ (σ_A × σ_B), range: -1 to +1
How to Interpret
+1 = perfect same direction, -1 = perfect opposite, 0 = no relationship. Aim for low correlations between portfolio holdings for true diversification.
Typical Ranges
Below 0.5 between portfolio holdings is desirable. Below 0 is excellent diversification.