A measure from +1 to −1 of how closely two investments move together. Lower correlation gives more diversification.
Example
Say you hold $5,000 in each of two stocks from the same industry, with a correlation of +0.9 between them. On a bad day for that industry both tend to fall together, so the pair behaves almost like one $10,000 position. Pairing one of them with an asset whose correlation to it is near 0, or negative, does far more to spread the risk.
Hypothetical numbers, for illustration only.
Two panels with asset A (solid line), asset B (dashed line) and their 50/50 mix (thick green line). Left, move together (high correlation): the three lines zigzag in step, and the note reads the mix swings almost as much. Right, move in opposite directions (low or negative correlation): A zigs while B zags, the green mix line is much smoother, and the note reads the mix swings less.