Which of the following is true regarding the concept of correlation?

The concept of correlation primarily refers to the statistical measure that expresses the extent to which two variables change in relation to each other. Therefore, when something is said to assess the relationship between different assets, it is capturing the essence of correlation. For example, if two assets have a high positive correlation, it means that when the price of one asset increases, the price of the other asset tends to also increase, and vice versa.

This understanding is fundamental in portfolio management, as investors can use correlation to diversify their portfolios. By combining assets with low or negative correlations, investors can potentially reduce overall portfolio risk. The assessment of relationships through correlation helps in making informed decisions about asset allocation and risk management.

The other options present alternative concepts that do not align with what correlation specifically measures. Absolute performance relates to the overall return of an asset rather than the relationship between different assets, while total risk involves both systematic and unsystematic risk but does not address correlations directly. Furthermore, correlation does not guarantee any future performance, as it merely indicates how two variables have historically moved in relation to each other.