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Whereas standard deviation shows how risky individual assets are, correlations show how asset risks are interrelated. Correlations are calculated by observing historical comovement in returns and range between –1 and 1.
A correlation of 1 means that returns move together perfectly, whereas a correlation of -1 implies perfect opposite movement. A 0 (zero) correlation implies independence. We generally observe positive correlations within an asset class (for example, equities) and between the major assets classes (for example, stocks and bonds); however, FX prices and commodity prices tend to have lower correlations to other asset classes.
