Correlation in finance refers to a statistical measure that describes the degree to which two assets move in relation to each other. Typically, correlation is expressed as a coefficient ranging from -1 to 1. A correlation of 1 indicates that the two assets move in perfect tandem, while a correlation of -1 suggests that they move in opposite directions. A correlation of 0 implies no relationship in the movements of the two assets.
This concept is essential for portfolio management, as it helps traders and investors understand how different assets might interact. For instance, when diversifying a portfolio, selecting assets with low or negative correlation can reduce overall risk. Understanding correlation can aid in making informed decisions regarding asset allocation and risk management strategies.