Why assets that appear different may still move together.
Correlation measures how returns have moved together. Diversification is effective when portfolio exposures respond differently to economic or market shocks.
| Concept | Explanation | |---|---| | Positive correlation | Assets often move in the same direction. | | Negative correlation | Assets often move in opposite directions. | | Low correlation | Movements have had a weaker relationship. | | Concentration risk | A portfolio depends excessively on one holding, sector, theme, geography, or risk factor. | | Correlation change | Relationships can strengthen during market stress, reducing diversification when it is needed most. |
Key idea: Owning many assets is not the same as being diversified. Several holdings can represent the same underlying economic bet.