Glossary · from the DESK dictionary
Correlation
A statistical measure (between -1 and +1) of the degree to which two variables move together.
In plain words
Shows whether two assets typically rise/fall together (positive correlation) or move oppositely (negative correlation).
In more detail
Correlation measures the linear co-movement of two variables on a scale from minus one to one. For portfolio construction it is the central input, because the diversification effect depends entirely on it. Three points are decisive in application: it captures only linear relationships, it says nothing about cause and effect, and it varies over time — in crises correlations between asset classes regularly rise towards one.
Example
An options strategy and an equity index show a correlation of 0.1 over three years — apparently independent. The relationship is nonlinear: on index declines above 8 percent the strategy loses disproportionately every time.
What it means for traders
A fundamental concept for portfolio construction and risk management.
Common pitfalls
Correlations aren't constant and can rise unexpectedly, especially during crises ("correlations go to 1").
Related terms
Beta · Correlation Coefficient · Covariance · Decoupling · Diversification
From the DESK dictionary. For information only, not investment advice.
This is one page of many.
- The DESK dictionary explains more than 9,400 market terms like this one, in English and German – searchable, sorted by topic and difficulty, with favourites.
- Plus the Macro Terminal with more than 900 indicators per country, company pages and a weekly report.
Also open to read: Glossary A–Z · Free calculators · Weekly report archive
DESK is a research tool and not investment advice. Page generated: 2026-10-12.