Correlation
Risk Management
What it means
How much two assets move together, from -1 (opposite) to +1 (identical). 0 means no relationship. It decides whether diversification is real.
Example
Two tech stocks might have +0.85 correlation -- they usually rise and fall together, so holding both barely reduces risk. A tech stock and gold might be near 0, giving real diversification.
Mistake beginners make
Beginners assume "different tickers = diversified." In a crash, correlations jump toward 1 and everything falls together; true diversification needs assets that are uncorrelated in bad times.
Related terms
- Diversification — Spreading risk across different assets, strategies, or markets so a single bad event canno…
- Hedge — A position opened to offset the risk of another position. If your main trade loses, the he…