What is 'Correlation'
Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management, computed as the correlation coefficient, which has a value that must fall between 1 and 1.
BREAKING DOWN 'Correlation'
A perfect positive correlation means that the correlation coefficient is exactly 1. This implies that as one security moves, either up or down, the other security moves in lockstep, in the same direction. A perfect negative correlation means that two assets move in opposite directions, while a zero correlation implies no relationship at all.
For example, largecap mutual funds generally have a high positive correlation to the Standard and Poor's (S&P) 500 Index  very close to 1. Smallcap stocks have a positive correlation to that same index, but it is not as high  generally around 0.8.
However, put option prices and underlying stock prices tend to have a negative correlation. As the stock price increases, the put option prices go down. This is a direct and highmagnitude negative correlation.
Correlation Calculation Example
Investment managers, traders and analysts find it very important to calculate correlation, because the risk reduction benefits of diversification rely on this statistic. Financial spreadsheets and software can calculate the value of correlation quickly.
Assume an analyst needs to calculate the correlation for the following two data sets:
X: 41, 19, 23, 40, 55, 57, 33
Y: 94, 60, 74, 71, 82, 76, 61
There are three steps involved in finding the correlation. The first is to add up all the X values to find SUM(X), add up all the Y values to fund SUM(Y) and multiply each X value with its corresponding Y value and sum them to find SUM(X,Y):
SUM(X) = (41 + 19 + 23 + 40 + 55 + 57 + 33) = 268
SUM(Y) = (94 + 60 + 74 + 71 + 82 + 76 + 61) = 518
SUM(X,Y) = (41 x 94) + (19 x 60) + (23 x 74) + ... (33 x 61) = 20,391
The next step is to take each X value, square it, and sum up all these values to find SUM(x^2). The same must be done for the Y values:
SUM(X^2) = (41^2) + (19^2) + (23^2) + ... (33^2) = 11,534
SUM(Y^2) = (94^2) + (60^2) + (74^2) + ... (61^2) = 39,174
Noting that there are seven observations, n, the following formula can be used to find the correlation coefficient, r:
r = (n x (SUM(X,Y)  (SUM(X) x (SUM(Y))) / SquareRoot((n x SUM(X^2)  SUM(X)^2) x (n x SUM(Y^2)  SUM(Y)^2))
In this example, the correlation would be:
r = (7 x 20,391  (268 x 518) / SquareRoot((7 x 11,534  268^2) x (7 x 39,174  518^2)) = 3,913 / 7,248.4 = 0.54

Benchmark For Correlation Values
A benchmark for correlation values is a point of reference that ... 
CrossCorrelation
Cross correlation is a measurement that tracks the movements ... 
Positive Correlation
Positive correlation is a relationship between two variables ... 
Regulation X
Regulation X is a rule that limits the amount of credit foreign ... 
Alston D. Correll
A former CEO and chairman of Atlantabased paper and building ... 
Time Value of Money  TVM
The time value of money is the idea that money presently available ...

Investing
How To Trade Currency And Commodity Correlations
Relationships between currencies and commodities exist throughout the financial markets. Find out how to trade these trends. 
Investing
Protecting Portfolios Using Correlation Diversification
Understanding correlation and uncorrelated assets can help protect against random events in the market for investors. Keep your portfolio safe today. 
Investing
Tales From The Trenches: Perfectly Negative Profitability
Use correlations to profit when two specific instruments move in opposite directions. 
Trading
Managing Currency Exposure In Your Portfolio
The value of your investments is impacted by changes in global currency exchange rates. Find out how. 
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. 
Financial Advisor
Example of Applying Modern Portfolio Theory (MPS)
See how an investor can maximize expected return for a given level of risk by altering the proportions of the assets held. 
Investing
Regression Basics For Business Analysis
This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how. 
Investing
Apple's iPhone X Is Sold Out in Many Major Cities
The new iPhone X hit store shelves this weekend and quickly sold out in at least 20 major cities. 
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.

What does it mean if the correlation coefficient is positive, negative, or zero?
When a coefficient is greater than zero, it is a positive relationship; when the value is less than zero, it is a negative ... Read Answer >> 
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 >> 
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 >> 
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 >> 
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 >> 
What does a negative correlation coefficient mean?
Discover the meaning of a negative correlation coefficient, how this compares to other correlation coefficients and examples ... Read Answer >>