What does the term "correlations go to one" refer to?

The term "correlations go to one" refers to the phenomenon where assets that typically exhibit low or no correlation become closely correlated during times of market stress or crisis. When correlations increase to one, it indicates that these assets are moving together in response to external factors, often leading to a reduction in the benefits of diversification, as investments that normally behave independently start to behave similarly.

This concept is particularly relevant in risk management and portfolio diversification, as it highlights how market dynamics can shift unexpectedly during economic downturns or financial stress, rendering previously uncorrelated assets vulnerable to similar risk factors. Understanding this behavior is crucial for investors and fund managers when constructing portfolios and preparing for different market conditions.