Correlation Risk Calculator
Holding multiple positions doesn't always mean diversification. If your positions are correlated, they move together — amplifying your risk instead of reducing it. This tool calculates your true effective exposure.
Add your positions and their correlation values. See how correlation affects your total risk and understand whether you're truly diversified or just holding multiple bets on the same market factor.
Positions
Correlations
Correlation Risk Analysis
Effective Exposure
$12129.40
Exposure Comparison
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Calculation Methodology
Correlation measures how positions move together. High correlation (near 1.0) means positions move in sync, increasing effective risk. Low correlation provides diversification, reducing effective risk.
Key Insight: Two $5,000 positions with 0.8 correlation have effective exposure of ~$8,900, not $10,000. The 11% reduction is diversification benefit. But if correlation is 0.95 (very high), effective exposure is ~$9,750 — almost no diversification. Correlation matters more than position count.
Learn more about portfolio management:
Position sizing guideExample Scenario
Setup: Two $5,000 positions, 0.8 correlation
What this means: While you have $10,000 in positions, the effective risk is only $8,900 because the positions don't move perfectly together. The 11% reduction is the diversification benefit from 0.8 correlation.
Comparison: At 0.95 correlation, effective exposure would be ~$9,750 (only 2.5% benefit). At 0.5 correlation, effective exposure would be ~$7,900 (21% benefit).
Common Mistakes & Warnings
- ⚠Assuming multiple positions = diversification: If all positions are correlated (BTC/ETH/SOL), you have concentration risk, not diversification.
- ⚠Ignoring correlation: Correlation can change over time. What's 0.5 today might be 0.9 during a crash. Plan for worst-case correlation.
- ⚠Not adjusting position sizes: If positions are highly correlated, reduce size to maintain target risk. Don't just add positions blindly.
- ⚠Using historical correlation: Past correlation doesn't guarantee future correlation. During market stress, correlations often spike to 0.9+.
- ⚠Overestimating diversification: Even 0.7 correlation provides only modest diversification. True diversification requires correlation below 0.5.
Example Scenarios
Try these realistic scenarios to understand how correlation affects portfolio risk.
Scenario 1: Low Correlation Portfolio
Diversified positions with low correlation. Good diversification benefit.
Step-by-Step Calculation:
- Individual variance: BTC² + Gold² = $5,000² + $5,000² = $50M
- Correlation term: 2 × 0.2 × $5,000 × $5,000 = $10M
- Portfolio variance: $50M + $10M = $60M
- Effective exposure: √$60M ≈ $7,746
- Diversification benefit: (1 - $7,746/$10,000) × 100 = 22.5%
What this means: With 0.2 correlation, effective exposure is $7,746 instead of $10,000. You get 22.5% diversification benefit because BTC and Gold don't move together. This is true diversification.
Scenario 2: Moderate Correlation (BTC/ETH)
Common crypto pair with moderate correlation. Some diversification benefit.
Step-by-Step Calculation:
- Individual variance: BTC² + ETH² = $5,000² + $5,000² = $50M
- Correlation term: 2 × 0.8 × $5,000 × $5,000 = $40M
- Portfolio variance: $50M + $40M = $90M
- Effective exposure: √$90M ≈ $9,487
- Diversification benefit: (1 - $9,487/$10,000) × 100 = 5.1%
What this means: With 0.8 correlation, effective exposure is $9,487 instead of $10,000. You only get 5.1% diversification benefit because BTC and ETH move together. This is minimal diversification - you're essentially holding correlated risk.
Scenario 3: High Correlation Portfolio
Highly correlated positions. Minimal diversification, high concentration risk. ⚠️ Concentration risk
Step-by-Step Calculation:
- Individual variance: BTC² + ETH² = $5,000² + $5,000² = $50M
- Correlation term: 2 × 0.95 × $5,000 × $5,000 = $47.5M
- Portfolio variance: $50M + $47.5M = $97.5M
- Effective exposure: √$97.5M ≈ $9,875
- Diversification benefit: (1 - $9,875/$10,000) × 100 = 1.25%
What this means: With 0.95 correlation, effective exposure is $9,875 instead of $10,000. You only get 1.25% diversification benefit - essentially no diversification. You're holding nearly identical risk twice.
Edge Case Warning: During market crashes, correlation often spikes to 0.98-0.99. Your effective exposure becomes nearly $10,000 (no diversification). Both positions will move together, doubling your risk instead of diversifying it.
What If Variations
Explore how changing correlation affects portfolio risk:
What if correlation increases from 0.8 to 0.95 during a crash?
Using Scenario 2: Diversification benefit drops from 5.1% to 1.25%. Effective exposure increases from $9,487 to $9,875. During stress, correlations spike, eliminating diversification benefits.
What if I add a 3rd position with 0.5 correlation to both?
Using Scenario 2: Adding a $5,000 position with 0.5 correlation to both BTC and ETH increases total exposure to $15,000 but effective exposure becomes ~$12,500. You get 16.7% diversification benefit from the third position.
What if positions are negatively correlated (-0.5)?
Using Scenario 2: Negative correlation provides hedging benefit. Effective exposure drops to ~$7,071 (29.3% benefit). When one goes up, the other goes down, reducing portfolio volatility.
Frequently Asked Questions
When should I use this tool?
Use this tool whenever you hold multiple positions to understand your true portfolio risk. Especially important when holding positions in correlated assets (like BTC and ETH), or when you think you're diversified but aren't. Check it before adding new positions to see if they increase effective exposure.
What is correlation risk?
When you hold multiple positions that move together (e.g., BTC and ETH), your effective risk is higher than simple addition. A 10% drop in both means double the impact. Correlation risk means you're not as diversified as you think — correlated positions act like one large position.
How do I find correlation?
Use historical price data to calculate correlation coefficients. Most trading platforms show 30-day or 90-day correlation. Values near 1.0 mean high correlation (move together), near 0 means independent, negative means inverse. Use 30-day for short-term trading, 90-day for longer-term.
What's a safe correlation level?
Positions with correlation above 0.7 should be treated as having combined risk. Diversify across uncorrelated assets (correlation < 0.3) for true risk reduction. Correlation above 0.8 means positions are nearly identical in risk — you're not diversified at all.
What if my effective exposure is much higher than nominal?
This means your positions are highly correlated and you're overexposed. Reduce position sizes, close some positions, or add uncorrelated positions. High effective exposure means you're taking more risk than you think — adjust your portfolio accordingly.
Can negative correlation help?
Yes — negative correlation provides hedging. If one position goes down, the other goes up, reducing portfolio volatility. However, negative correlation also reduces upside — when one wins, the other loses. It's a trade-off between risk reduction and profit potential.
How does correlation change over time?
Correlation is not static — it changes with market conditions. During market crashes, correlations often spike (everything moves together). During bull markets, correlations can decrease. Use recent correlation data (30-day) rather than long-term averages for current risk assessment.
Should I avoid correlated positions entirely?
Not necessarily — correlated positions can be fine if you size them appropriately. The key is understanding that correlated positions = combined risk. If you want $10,000 exposure to crypto, you can do it with one BTC position or split between BTC and ETH — the risk is similar.
What's the difference between this and Capital at Risk?
Capital at Risk shows total exposure assuming positions are independent. Correlation Risk shows effective exposure accounting for how positions move together. Use Capital at Risk for initial planning, Correlation Risk for true portfolio risk assessment.
How do I diversify effectively?
Diversify across assets with low correlation (<0.3). BTC and ETH are not diversification (0.8+ correlation). BTC and a stablecoin grid, or BTC and a DeFi token with low correlation, provide real diversification. Use this tool to verify your diversification actually reduces risk.
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