Correlation: Why Mixing Helps

Mixing assets that do not move in lockstep smooths a portfolio’s ride. Here is what correlation means, with real numbers showing which funds really diversify a stock portfolio.

What correlation measures

Correlation measures how closely two investments move together, on a scale from +1 to −1. At +1 they move in lockstep; at 0 there is no consistent relationship; at −1 they move in opposite directions. Combining assets with low correlation means that when one has a bad day, the other often does not.

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