Correlation measures the degree to which two assets move in relation to each other, expressed as a coefficient between -1 and +1. A correlation of +1 means the two assets move perfectly in tandem; -1 means they move in exactly opposite directions; 0 means no relationship. In portfolio construction, combining assets with low or negative correlations reduces overall portfolio volatility without sacrificing expected returns this is the mathematical foundation of diversification. In Indian portfolios, equities and gold have historically shown low to slightly negative correlation, particularly during market stress, making gold a useful diversifier. Portfolio correlation is not static during major crises, correlations across asset classes often spike toward +1 as all assets sell off together, temporarily reducing diversification benefits at the worst possible moment.
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