What Is Correlation Risk?

Summary

Correlation risk is the risk that positions move together, especially during market stress. It matters because several small trades can behave like one much larger exposure when losses start to cluster.

Definition

Correlation risk is the risk that separate positions move in the same direction at the same time, particularly in stressed conditions. The article explains that this can make several trades behave like one larger exposure, even if each trade looked modest on its own. That is why risk should not be judged position by position in isolation. If multiple holdings share the same sector, region, theme, or event driver, their combined practical risk may be higher than a simple count of positions suggests. The article also notes that in stress, correlation often rises rather than falls, which can worsen portfolio damage when it matters most.

Sources

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