LESSON 8.3 · CORE

What correlation looks like on a chart

Two lines that move together, and what that costs you.

BUILDING A PORTFOLIO4 MIN READ

Put two share prices on one chart. If they rise and fall on the same days, that's co-movement. The correlation coefficient turns it into one number from −1 to +1: +1 means they move in lockstep, 0 means there's no relationship, and −1 means one reliably rises when the other falls. That number is their correlation.

The cost of high correlation is that it removes the cushion. Two holdings that move differently offset some of each other's bad days, so the portfolio swings less than either does alone. Two that move together add their bad days up. Correlations aren't fixed, either: in a market panic, things that usually move independently often fall together, just when the cushion would help most. The app doesn't calculate correlation between your holdings, so it's something you judge from how their prices have behaved.

+1 · move together0 · unrelated−1 · move opposite

The closer to +1, the less two holdings cushion each other.

See how your sectors have moved →

Educational content only. It is not personal financial advice.