Correlation
A measure from -1 to +1 of how closely two assets' returns move together.
Formula
Correlation = Covariance of A and B / (Standard Deviation of A x Standard Deviation of B)
Unit
ratio (x, times)
In depth
Correlation is the key input to diversification: assets with low or negative correlation reduce portfolio volatility when combined, while highly correlated assets do not, however many are held. It measures only the linear relationship, so two assets can be strongly related in a non-linear way and still show near-zero correlation. Correlations are unstable and tend to rise sharply during market stress, which is the well-documented reason diversification disappoints precisely when it is most needed. It is also not causation — two assets can be correlated because both respond to a third factor.
Worked example
Two assets correlated at 0.85 behave nearly identically, so combining them barely reduces volatility. At a correlation of 0.15 the same combination reduces portfolio volatility substantially — the correlation, not the count, does the work.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Correlation” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.