Angie · learn
Correlation
How closely two things move together, from −1 to +1. Diversification depends on it, and it has an unhelpful habit of rising toward 1 in a crisis.
Updated 2026-09-05
Correlation measures how closely two things move together, on a scale from −1 to +1. At +1 they move identically, at 0 independently, at −1 in exact opposition.
It is the input diversification actually depends on, and it has a well-documented habit of betraying you. In calm markets asset correlations look comfortably low. In a crisis they converge toward 1, because forced selling is indiscriminate, and the diversification you measured in good conditions evaporates in the conditions you bought it for.
See also
- Diversification — Holding enough uncorrelated positions that no single one can ruin you. It removes company-specific risk and cannot touch market risk.
- Beta — How much the stock moves relative to the S&P 500. A beta of 1.0 moves with the market, higher is more volatile, and higher volatility raises the discount rate.
- Volatility — How much a price moves around, usually stated as annualised standard deviation. It is a measure of variability, not of danger, though the two often coincide.
Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.
