Correlation
The degree to which two things move together, from −1 to +1.
At +1 two assets move in lockstep and owning both achieves nothing. At 0 they are unrelated. At −1 they move exactly opposite. Diversification works entirely through this number.
The cruel property of correlation is that it rises in crises. Assets that seemed unrelated for a decade all fall together on the same afternoon, because in a panic everyone sells everything they can.
Volatile is not the same as risky
The jumpy line ends higher. The calm one quietly walks to zero. Volatility is what you feel; risk is what actually takes your money.
It, and not the number of holdings, determines how much risk diversification actually removes.
Believing your diversification will hold up in a crash. Historically, it usually does not.
Related terms
See Correlation on a real company
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