The statistical measure of how two investments move in relation to each other — ranging from +1 (perfect positive correlation) to -1 (perfect negative correlation).
Deeper Explanation
Correlation is the foundational concept of diversification: combining assets with low or negative correlations reduces portfolio volatility without necessarily reducing expected returns. However, correlations are not stable — they tend toward 1.0 in crises, precisely when diversification is most needed. The 2008 financial crisis demonstrated that assets which appeared uncorrelated (US equities, international equities, real estate, and high-yield bonds) all fell simultaneously as liquidity was withdrawn from every market. True diversification requires exposure to assets whose return drivers are genuinely independent — not just historically uncorrelated during benign conditions.
Continue Learning
Go deeper into the Value school — frameworks, case studies, and decision systems.