GLOSSARY // Technical Analysis
Correlation
Correlation measures how closely two assets move in relation to each other, expressed as a number from -1 to +1. A correlation of +1 means they move in perfect lockstep, -1 means they move in perfect opposite directions, and 0 means their movements are unrelated.
Diversification only genuinely reduces risk when the assets in a portfolio have low or negative correlation with each other; holding ten stocks that all move together in a downturn provides far less protection than the number of holdings might suggest.
Two stocks in the same industry might show a 0.85 correlation, meaning they move together most of the time, while a stock and a long-term Treasury bond might show a correlation closer to 0.1 or even negative, which is why bonds are often added to equity portfolios specifically for that diversification effect.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.