What is Correlation?
How much two markets move together, from −1 to +1. +1 = always the same direction, 0 = no relationship, −1 = opposite. Diversification only works between markets with low or negative correlation — two markets at +0.9 are almost the same bet. Correlations change with the regime, so we show three horizons: daily over 12 months (what is happening now), weekly over 3 years, monthly over 10 years (the long-run relationship). The Hedge Health indicator uses a shorter 36-month monthly window, because it asks a different question: which regime are we in now.
Correlation measures how closely two investments move together, on a scale from −1 to +1. At +1 they always move in the same direction; at 0 there is no relationship; at −1 they move in opposite directions.
For portfolios, correlation is what makes diversification work: combining assets with low or negative correlation reduces the swings of the whole portfolio without necessarily reducing its return.
Correlations are not stable. They often rise in crises — exactly when diversification is needed most — which is why we show them over several horizons.
Related terms
See Correlation applied to real markets — 30 markets, decades of data — in the Research Terminal.
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