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Correlation

A measure of how closely two assets move together, from -1 to +1.

Risk & PsychologyIntermediate

Definition

A correlation of +1 means they move in lockstep, 0 means no relationship and -1 means opposite moves. Holding assets that are not highly correlated is what makes diversification work.

Watch out for

Correlations change, and in sharp sell-offs many assets fall together.

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