Correlation
A value between -1 and +1 that shows how two investments move together—lower correlation improves diversification.
What You Need to Know
Correlation quantifies the relationship between two assets:
- +1.0: Move in lockstep (same direction, same magnitude)
- 0.0: No relationship (random movement)
- -1.0: Move perfectly opposite (ideal diversifier)
Use Cases:
- Blend assets with low or negative correlations to reduce portfolio volatility
- Understand why international stocks and commodities help during U.S. market drops
- Avoid owning multiple funds with high overlap (correlation near +1)
Example: Stocks vs. bonds typically show correlation around 0.2—bonds tend to hold up when stocks fall.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/correlation
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.