A:

In the field of statistics, positive correlation describes the relationship between two variables which change together, while an inverse correlation describes the relationship between two variables which change in opposing directions. Inverse correlation is sometimes described as negative correlation, which describes the same type of relationship between variables.

Examples of positive correlations occur in most people's daily lives. The more hours an employee works, for instance, the larger that employee's paycheck will be at the end of the week. The more money is spent on advertising, the more customers buy from the company.

Inverse correlations describe two factors that seesaw relative to each other. Examples include a declining bank balance relative to increased spending habits and reduced gas mileage relative to increased average driving speed. One example of an inverse correlation in the world of investments is the relationship between stocks and bonds. As stock prices rise, the bond market tends to decline, just as the bond market does well when stocks are underperforming.

It is important to understand that correlation does not necessarily imply causation. Variables A and B might rise and fall together, or A might rise as B falls, but it is not always true that the rise of one factor directly influences the rise or fall of the other. Both may be caused by an underlying third factor, such as commodity prices, or the apparent relationship between the variables might be a coincidence.

The number of people connected to the Internet, for example, has been increasing since its inception, and the price of oil has generally trended upward over the same period. This is a positive correlation, but the two factors almost certainly have no meaningful relationship. That both the population of Internet users and the price of oil have increased is likely to be a coincidence.

RELATED FAQS
  1. How should I interpret a negative correlation?

    Learn more about correlation and how businesses analyze variables. Find out how negative correlations are interpreted by ... Read Answer >>
  2. What are some examples of positive correlation in economics?

    Learn the most common examples of positive correlation in macroeconomics and microeconomics, including demand and price, ... Read Answer >>
  3. 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 >>
  4. How do you calculate R-squared in Excel?

    Calculate R-squared in Microsoft Excel by creating two data ranges to correlate. Use the correlation formula to correlate ... Read Answer >>
Related Articles
  1. Investing

    The Risks of Investing in Inverse ETFs

    Discover analyses of the risks inherent to inverse exchange-traded funds (ETFs) that investors must understand before considering an investment in this type of ETF.
  2. Trading

    Managing Currency Exposure In Your Portfolio

    The value of your investments is impacted by changes in global currency exchange rates. Find out how.
  3. Investing

    Two Great Currencies To Profit From Oil Volatility

    U.S. dollar crosses with Canadian and Australian dollars offer easy access to crude oil trends due to their tight correlation with energy futures.
  4. Tech

    Are Bitcoin Price And Equity Markets Returns Correlated?

    Is there a correlation between bitcoin's price and the equity markets? We investigate.
  5. Investing

    How to Diversify Your Portfolio Beyond Stocks

    Find out how to get diversified in asset classes beyond stocks to reduce portfolio risk. Learn how diversification can help you reach your financial goals.
  6. Investing

    Commodities: The Portfolio Hedge

    These diverse asset classes can provide downside protection and upside potential. Find out how to use them.
  7. Investing

    A Guide to Using Inverse ETFs for Diversification

    A look at how inverse ETFs can help investors diversify their portfolios.
  8. Investing

    The Long and Short of Inverse ETFs

    When applied properly, inverse ETFs can be a useful tool for traders.
  9. Investing

    Behind United Airline's 91.6% Rise in 10 Years (UAL)

    United Continental's stock has been impacted by oil prices and economic cycles, but its statistical correlation to the market has been very low.
  10. Financial Advisor

    Illiquid Real Estate: Correlation Pros and Cons

    Stock and bond markets are moving more closely in tandem with each other. Is illiquid real estate the vaccine for this correlation?
RELATED TERMS
  1. Positive Correlation

    Positive correlation is a relationship between two variables ...
  2. Benchmark For Correlation Values

    A benchmark for correlation values is a point of reference that ...
  3. Serial Correlation

    Serial correlation is the relationship between a given variable ...
  4. Decoupling

    Decoupling is the occurrence of returns on asset classes diverging ...
  5. Cross Hedge

    A cross hedge is used to manage risk by investing in two positively ...
  6. Recoupling

    Recoupling is a market event or process when returns on asset ...
Trading Center