When you strip the noise away, the real question is simple: in a crisis, correlations converge — which means diversification fails exactly when you need it most. Mechanism: Assets that appear uncorrelated in normal markets can move in lockstep during stress events. This makes naive diversification less protective than it appears. Why it matters: That is why stress-testing should use conditional correlations, not historical averages. Market translation: In March 2020, equities, credit and even gold initially sold off together as liquidity evaporated. The diversification that "worked" in 2019 failed in the first weeks of the crisis. Failure mode: The mistake is building portfolio protection around average-condition math when tails are where the real damage happens. Review question: Before sizing up, identify whether the edge comes from cash flow, volatility, timing or balance-sheet structure. The point is not to memorize the label. The point is to know what variable is actually doing the work.