What it is
Correlation is a statistical measure that expresses the extent to which two variables tend to move together. In finance, it quantifies the relationship between the price movements of different assets. A correlation of +1 indicates perfect positive correlation, meaning assets move in the same direction. A correlation of -1 signifies perfect negative correlation, where assets move in opposite directions. A correlation of 0 suggests no linear relationship.
Investors use correlation to enhance portfolio diversification. Combining assets with low or negative correlation can help reduce overall portfolio risk, as declines in one asset may be offset by gains or stability in another. For example, during market downturns, assets like gold or certain bonds might show a low or negative correlation with stocks. Understanding correlation is key to strategic asset allocation.
Why it matters
Correlation helps you build a diversified portfolio by combining assets that don't move in lockstep. This can reduce overall risk.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice