Correlation

Correlation — the degree to which two holdings move together (+1 in lockstep, 0 unrelated, −1 opposite). Diversification only works when holdings are imperfectly correlated — the PSEi’s flat decade while the S&P compounded is lived proof that the course’s two equity sleeves are genuinely different machines. The honest catch: in a global crash, equity correlations converge toward 1 — everything falls together — which is why the guaranteed layer (MP2 can’t mark down; maturing rungs pay par) is the only diversification that holds exactly when needed. Concentration hides in styles too, not just stocks: ten funds with one bet repeated is correlation wearing a disguise.

First used in: 2.6 · Portfolio construction