Portfolio Risk Correlation

Portfolio risk correlation is the statistical measurement of how different assets or positions in a portfolio move in relation to one another. In a diversified portfolio, low correlation is desirable because it provides a hedge against the failure of a single asset class.

However, during market crashes, correlations often trend toward one, meaning all assets decline simultaneously. This behavior is particularly prevalent in the crypto market, where most tokens are highly correlated with Bitcoin.

Understanding this correlation is vital for risk management, as it prevents traders from assuming they are diversified when, in reality, their positions are exposed to the same systemic risk factors.