Correlation and Concentration

What this unit covers

Learn to read a correlation figure between holdings and connect it to real concentration risk, turning "too concentrated or over-diversified" into an actual number.

By the end you will be able to

• Explain what a correlation figure measures and read where it falls on the together-to-independent scale.
• Judge whether a pair of holdings is genuinely diversified or functionally concentrated, using correlation rather than count.
• Explain why a correlation figure reflects past price behaviour and is not a guarantee of future movement.

How it starts: Two Holdings, One Number

1. Two portfolios each hold exactly two stocks worth the same amount.
2. One pair scores plus 0.85 together, the other only plus 0.15.
3. Both count as two holdings, so which one is actually taking two separate risks?

Words you will meet

Correlation

A number roughly from minus 1 to plus 1 showing how closely two holdings' prices move together.

In this module: Portfolio Analytics

1. Return and Drawdown
2. Correlation and Concentration (this unit)
3. Risk-Adjusted Performance
4. Portfolio Review