A:

Negative correlation with regard to stocks means two individual stocks have a statistical relationship such that they generally move in opposite directions in price action. For example, say Stock A ends up $5 at the end of a trading day, while Stock B is down $5. If this is a common occurrence over time, it is likely the stocks are negatively correlated.

Stocks that generally move in the same direction together are positively correlated. Correlation is a statistical measure on a scale from -1.00 to +1.00. -1.00 represents a perfect negative correlation, while +1.00 represents a perfect positive correlation. To determine whether there is a negative correlation between two stocks, run a linear regression on the individual stock prices by having one stock serve as the dependent variable and the other as the independent variable. The output from the regression includes the correlation coefficient and shows how the two stocks move in relation to each other.

Negative correlation is an important concept in the construction of portfolios. Investors should seek to include some negatively correlated assets to protect against volatility for the overall portfolio. Many stocks are positively correlated with each other and the overall stock market, which can make diversification with only stocks difficult.

Investors may look outside the stock market for assets that are negatively correlated. Commodities may have a higher likelihood of having a negative correlation with the stock market. However, the amount of correlation between the prices of commodities and the stock market shifts over time. One aspect of the degree of correlation between the stock market and commodities is volatility.

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