Ch.10 · Benchmarks and Performance Evaluation · medium
What is 'correlation' and how does it affect portfolio diversification?
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EXPLANATION
Correlation ranges from -1 (perfectly inverse) to +1 (perfectly in sync). Assets with low or negative correlation diversify each other — when one falls, the other may rise or hold steady. For example, gold often has low correlation with equities, making it a good diversifier. Perfectly correlated assets (+1) provide no diversification benefit.
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