Correlation (Investing)
InvestingGlossary term
Definition
A statistical measure of how two investments move in relation to each other, ranging from -1 (perfect inverse) to +1 (perfect sync). Low or negative correlation between assets is the foundation of diversification, as losses in one may be offset by gains in another.
Related terms
- DiversificationA risk management strategy that mixes different types of investments within a portfolio. The goal is to reduce exposure to any single asset or risk.
- Modern Portfolio TheoryA framework developed by Harry Markowitz that shows how investors can construct portfolios to maximize expected return for a given level of risk through diversification. The theory demonstrates that portfolio risk depends not just on individual assets but on how they correlate.
- Asset AllocationAn investment strategy that balances risk and reward by dividing investments among different asset categories, such as stocks, bonds, and cash, based on goals and risk tolerance.
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