Correlation describes a sample, not a promise
Correlation ranges from −1 to +1 and must refer to a stated return frequency and period. Positive values indicate a tendency to move together, while values near zero indicate little linear co-movement in that sample. Zero correlation does not establish independence or exclude joint extreme losses.
For two assets, portfolio variance is w₁²σ₁² + w₂²σ₂² + 2w₁w₂σ₁σ₂ρ. Here w denotes capital weights, σ individual volatilities and ρ correlation. Variance is volatility squared. The last term captures co-movement, so counting holdings or simply adding individual volatilities does not measure diversification.
Worked example: 14.14% becomes 19.49%
Assume two imaginary assets each have annualised volatility of 20%, equal 50% weights and zero correlation. Portfolio variance is 0.5² × 0.20² + 0.5² × 0.20² = 0.0200. Portfolio volatility is the square root, approximately 14.14%.
Now keep the weights and individual volatilities unchanged but set correlation to 0.9. The interaction adds 0.0180, so variance becomes 0.0380 and volatility approximately 19.49%. The account holds the same two assets, yet its estimated diversification benefit is much smaller. These are model scenarios, not forecasts of future volatility.
Shared drivers can emerge in a crisis
Correlations can change during inflation shocks or market stress. A long historical average can hide recent joint declines, and a short sample can be unstable. Several funds may own the same underlying companies. Diversification also cannot guarantee that a portfolio will avoid a loss or meet a particular spending need.
Look for simultaneous declines
Compare available closed daily, weekly or monthly bars over matching dates and look for periods when supposedly different assets fell together. Check fund holdings and the economic drivers separately. Student Wyckoff Pro supports closed-bar price analysis; the covariance calculations and holdings audit require their own consistently prepared records.
Primary sources
Sources explain the mechanics and limitations; the editorial examples use invented numbers rather than market quotations.
Your next practical step
Explore the available closed daily, weekly and monthly bars in the analysis workspace.
Open the first-chart instructions ↗