> ## Documentation Index
> Fetch the complete documentation index at: https://kalpi.ai/docs/llms.txt
> Use this file to discover all available pages before exploring further.

# Correlation Matrix

> Audit the internal diversification of your strategy to ensure your assets are not moving in identical lockstep.

**Correlation** measures the statistical relationship between the price movements of the different assets inside your portfolio. It is the mathematical backbone of true diversification.

If you build a portfolio of 20 stocks, but they all have a perfect positive correlation with each other, you are not actually diversified—you just own 20 versions of the exact same risk profile.

## Interpreting the Correlation Coefficient ($r$)

Correlation is measured on a strict scale from **-1.0 to +1.0**.

|                  | Relationship     | Strategic Impact                                                                                 |
| ---------------- | :--------------- | :----------------------------------------------------------------------------------------------- |
| **+1.0**         | Perfect Positive | Assets move in the exact same direction at the exact same time. Zero diversification benefit.    |
| **+0.5 to +0.8** | Strong Positive  | Assets are highly related (often in the same sector, like two IT stocks). High structural risk.  |
| **0.0**          | Uncorrelated     | Asset movements are completely independent of one another. The holy grail of risk reduction.     |
| **-0.5 to -1.0** | Negative         | Assets move in opposite directions. Excellent for hedging (e.g., holding Gold against Equities). |

## The Kalpi Correlation Matrix

Inside the **Correlation** tab of your Portfolio Analysis, Kalpi generates a visual matrix plotting the relationship between every single asset in your basket.

Look for heavy clusters of dark red (highly correlated) variables. If you see a cluster, your algorithm is over-exposed to a specific sector or macroeconomic factor, and you should manually swap one of those assets out in the Basket Builder.