Risk correlation measures statistical relationships between risk events, helping organizations understand how risks cluster, cascade, or offset each other. Positive correlation means risks tend to materialize simultaneously, while negative correlation suggests one risk's occurrence reduces another's likelihood. For instance, interest rate increases correlate positively with borrower default rates but negatively with reinvestment risk. Failing to account for correlations can lead to underestimated portfolio risk, as diversification benefits disappear when correlated risks activate together. Advanced risk modeling incorporates correlation matrices to produce more accurate aggregate risk assessments and capital requirements.