What is Correlation?
A measure of how closely two assets' prices move together, from -1 to +1.
Formal Definition
Correlation quantifies the linear relationship between the returns of two assets, ranging from +1 (move perfectly together) through 0 (no linear relationship) to -1 (move perfectly opposite). Low or negative correlations between holdings are the mathematical engine of diversification, reducing portfolio volatility without necessarily sacrificing return.
In Simple Terms
It tells you whether two investments tend to rise and fall together or move in opposite directions. Owning things that do not move in lockstep smooths out your overall ride.
Example
Airline and oil stocks often show negative correlation, since rising fuel costs hurt airlines but help energy companies.