Don't look now, but asset correlations have been rising again. While asset correlation is normally only a subject that would interest the true finance and math nerds among us, it has a very real impact on the regular investor's portfolio. In particular, it threatens the very heart of diversification and investors who believe themselves to be insulated from bad markets by a broad portfolio may be in for a very rude surprise. (For related reading, also see Top 5 Signs Of A Credit Crisis.)
What is Correlation?
Correlation is basically a mathematical measure of the extent to which two variables "move together". If Stock A moves 5% and Stock B moves 5%, the correlation is 100% (or 1.0). If there is no apparent linkage between the move of Stock A and Stock B, the correlation may be zero, and in some cases there can be negative correlation (as one goes up, the other goes down).
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