Inverse Correlation

AAA

DEFINITION of 'Inverse Correlation'

A contrary relationship between two variables such that they move in opposite directions. In an inverse correlation with variables A and B, as A increases, B would decrease; as A decreases, B would increase. In statistical terminology, an inverse correlation is denoted by the correlation coefficient r having a value between -1 and 0, with r = -1 indicating perfect inverse correlation.


Also known as negative correlation.

INVESTOPEDIA EXPLAINS 'Inverse Correlation'

In financial markets, the best example of an inverse correlation is probably the one between the U.S. dollar and gold. As the U.S. dollar depreciates against major currencies, gold is generally perceived to rise, and as the U.S. dollar appreciates, gold declines in price.


Two points need to be kept in mind with regard to negative correlation. First, the existence of negative correlation (or positive correlation, for that matter) does not necessarily imply a causal relationship. Second, the relationship between two variables is not static and will fluctuate over time, which means that they may display an inverse correlation during some periods and a positive correlation during others.

RELATED TERMS
  1. Negative Correlation

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

    A relationship between two variables in which both variables ...
  3. Statistically Significant

    The likelihood that a result or relationship is caused by something ...
  4. Correlation Coefficient

    A measure that determines the degree to which two variable's ...
  5. Correlation

    In the world of finance, a statistical measure of how two securities ...
  6. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
Related Articles
  1. 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.
  2. Forex Education

    How To Trade Currency And Commodity Correlations

    Relationships between currencies and commodities exist throughout the financial markets. Find out how to trade these trends.
  3. Forex Education

    Using Currency Correlations To Your Advantage

    Knowing the relationships between pairs can help control risk exposure and maximize profits.
  4. Insurance

    The Dangers Of Over-Diversifying Your Portfolio

    If you diversify too much, you might not lose much, but you won't gain much either.
  5. Active Trading

    Modern Portfolio Theory: Why It's Still Hip

    See why investors today still follow this old set of principles that reduce risk and increase returns through diversification.
  6. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.
  7. Fundamental Analysis

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  8. Investing

    How to Use Stratified Random Sampling

    Stratified random sampling is a technique best used with a sample population easily broken into distinct subgroups. Samples are then taken from each subgroup based on the ratio of the subgroup’s ...
  9. Economics

    How A Limited Government Affects A Country's Finances

    Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?
  10. Fundamental Analysis

    Lognormal and Normal Distribution

    When and why do you use lognormal distribution or normal distribution for analyzing securities? Lognormal for stocks, normal for portfolio returns.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center