Correlation

Loading the player...

What is 'Correlation'

Correlation, in the world of finance, is a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management.

BREAKING DOWN 'Correlation'

Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.

In real life, perfectly correlated securities are rare, rather you will find securities with some degree of correlation.

RELATED TERMS
  1. Inverse Correlation

    A contrary relationship between two variables such that they ...
  2. Negative Correlation

    A relationship between two variables in which one variable increases ...
  3. Positive Correlation

    A relationship between two variables in which both variables ...
  4. Benchmark For Correlation Values

    A benchmark or point of reference chosen by an investment fund ...
  5. Correlation Coefficient

    A measure that determines the degree to which two variable's ...
  6. Cluster Analysis

    An investment approach that places securities into groups based ...
Related Articles
  1. Investing

    Correlation

    In the world of finance, correlation is a statistical measure of how two securities move in relation to each other.
  2. Products and Investments

    4 Reasons Why Market Correlation Matters

    Learn about how correlation can be used to measure how broader markets move in relation to each other. See how correlation is used to manage risk.
  3. Trading Strategies

    Pairs Trading: Correlation

    Correlation is a term from linear regression analysis that describes the strength of the relationship between a dependent variable and an independent variable. Central to pairs trading is the ...
  4. Economics

    Understanding the Oil & Gas Price Correlation

    Learn how the correlation between the commodity prices for natural gas and oil changed from 2004 to 2015 due to increased natural gas production.
  5. Active Trading

    What's the Correlation Coefficient?

    The correlation coefficient is a measure of how closely two variables move in relation to one another. If one variable goes up by a certain amount, the correlation coefficient indicates which ...
  6. Investing Basics

    Diversification: Protecting Portfolios From Mass Destruction

    This investing strategy retains its charm as a protection against random events in the market.
  7. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  8. Investing Basics

    Diversification Beyond Stocks

    If you think holding several stocks means you're diversified, think again - there's much more to be done to reduce portfolio risk.
  9. Trading Strategies

    How to Create a Risk Parity Portfolio

    Learn about how risk parity uses leverage to create equal exposure to risk among different asset classes in portfolio construction.
  10. Forex Education

    Managing Currency Exposure In Your Portfolio

    The value of your investments is impacted by changes in global currency exchange rates. Find out how.
RELATED FAQS
  1. How do I find positive correlation in the stock market?

    Learn how positive correlation is found in the stock market, how correlation is calculated and how positive correlation is ... Read Answer >>
  2. How does correlation affect the stock market?

    Learn about the role correlation plays in prudent stock market investing, and how the correlation coefficient is used to ... Read Answer >>
  3. Does a negative correlation between two stocks mean anything?

    Learn what the concept of negative correlation means, understand how it is generally calculated and see how it is used in ... Read Answer >>
  4. What is the difference between a copay and a deductible?

    Learn how the correlation coefficient may be used to predict the relationship between the returns of two stocks, but also ... Read Answer >>
  5. How do I calculate correlation between market indicators and specific stocks?

    Discover how to calculate the correlation coefficient between market indicators and stock prices, a critical skill in technical ... Read Answer >>
  6. How can you calculate correlation using Excel?

    Find out how to calculate the Pearson correlation coefficient between two data arrays in Microsoft Excel through the CORREL ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center