Correlation spike
Definition · Level 9 · Risk & portfolio
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In a crash, correlations between risky assets jump toward +1 because everyone sells together, so holdings that looked diversified fall in step.
Example
Two stocks at a 0.3 correlation in calm markets can show 0.9 in a sell-off.
Where Tradecraft teaches it
Level 9 · Risk & portfolio, in the lesson “Concentration, liquidity & crises”: Limits on one stock, days to liquidate, and why diversification fails and exits narrow in a crash.
Related terms
- Concentration riskHaving too much riding on one name, sector, factor or counterparty, so a single event can do outsized damage.
- Days to liquidatePosition size divided by the volume you can trade per day without moving the price (often 10–25% of average daily volume).
- Liquidity riskThe danger that a position can’t be exited (or funded) quickly without a big price concession: spreads widen and depth vanishes exactly in stress.
- 1RThe dollar amount at risk on a trade (entry-to-stop distance × size), used as the unit for measuring every result.
- AlphaReturn earned above what the asset’s market exposure predicts: Rp − [Rf + β(Rm − Rf)].
- AnchoringFixating on an arbitrary reference price, such as your entry or a prior high, when judging what something is worth now.