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.

Negative Correlation
A relationship between two variables in which one variable increases ... 
Positive Correlation
A relationship between two variables in which both variables ... 
Correlation
In the world of finance, a statistical measure of how two securities ... 
Statistically Significant
The likelihood that a result or relationship is caused by something ... 
Correlation Coefficient
A measure that determines the degree to which two variable's ... 
Sharpe Ratio
A ratio developed by Nobel laureate William F. Sharpe to measure ...

What is the difference between positive correlation and inverse correlation?
In the field of statistics, positive correlation describes the relationship between two variables which change together, ... Read Full Answer >> 
Are all fixed costs considered sunk costs?
In accounting, finance and economics, all sunk costs are fixed costs. However, not all fixed costs are considered to be sunk. ... Read Full Answer >> 
What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?
The parametric method, also known as the variancecovariance method, is a risk management technique for calculating the value ... Read Full Answer >> 
What is backtesting in Value at Risk (VaR)?
The value at risk is a statistical risk management technique that monitors and quantifies the risk level associated with ... Read Full Answer >> 
How much variance should an investor have in an indexed fund?
An investor should have as much variance in an indexed fund as he is comfortable with. Variance is the measure of the spread ... Read Full Answer >> 
Can the correlation coefficient be used to measure dependence?
The correlation coefficient can be used to measure the linear dependence between two random variables. The most common correlation ... Read Full Answer >>

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. 
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. 
Forex Education
Using Currency Correlations To Your Advantage
Knowing the relationships between pairs can help control risk exposure and maximize profits. 
Insurance
The Dangers Of OverDiversifying Your Portfolio
If you diversify too much, you might not lose much, but you won't gain much either. 
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. 
Fundamental Analysis
Explaining Expected Return
The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome. 
Economics
Understanding the Fisher Effect
The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. 
Fundamental Analysis
Explaining the Geometric Mean
The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio. 
Investing
The Labor Market Recovery’s Missing Ingredient
Job creation is running at the fastest pace since the 90s, and there is some evidence that wage growth is finally starting to accelerate, albeit modestly. 
Trading Strategies
Best Undergraduate Degrees For Day Traders
We look at some popular undergrad majors for those wanting to begin a career in the exciting world of fastpaced trading.