Correlation

What it is

Correlation measures how much two things move together, on a scale from −1 to +1.

Why it is the core of portfolio risk

Two assets that each look attractive can be the same exposure:

• Low correlation — gains and losses partly offset, smoother path
• High correlation — losses arrive together, and the drawdown adds up

A portfolio of ten highly correlated names is one position with extra steps. That is not diversification — it is concentration wearing a disguise.

How to check

Ask for the correlation matrix, not just the holdings list. A strategy claiming diversification should be able to show what the correlations actually were over the test period — not what they are assumed to be.