A statistical measure (ranging from -1 to 1) of the relationship between two variables. It indicates whether the two variables tend to move independently one from the other or if they move in tandem (in the same direction or in the opposite direction).
Correlations are widely used by financial professionals to build a diversified portfolio. Their objective is to combine assets that will move independently to minimize risks. One drawback of correlations is that the relationship between assets is usually not stable over time. In periods of stress, all assets tend to move in the same direction because people sell them.