What does 'Inverse Correlation' mean
An inverse correlation, also known as negative correlation, is a contrary relationship between two variables such that they move in opposite directions. For example, with variables A and B, as A increases, B decreases, and as A decreases, B increases. 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.
BREAKING DOWN '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 fluctuates over time, which means the variables may display an inverse correlation during some periods and a positive correlation during others.
Inverse Correlation Calculation Example
Calculating correlation is important because the risk reduction benefits of portfolio diversification rely on this statistic. The example presented below shows how to calculate the statistic.
Assume an analyst needs to calculate the correlation for the following two data sets:
X: 55, 37, 100, 40, 23, 66, 88
Y: 91, 60, 70, 83, 75, 76, 30
There are three steps involved in finding the correlation. First, add up all the X values to find SUM(X), add up all the Y values to find SUM(Y) and multiply each X value with its corresponding Y value and sum them to find SUM(X,Y):
SUM(X) = (55 + 37 + 100 + 40 + 23 + 66 + 88) = 409
SUM(Y) = (91 + 60 + 70 + 83 + 75 + 76 + 30) = 485
SUM(X,Y) = (55 x 91) + (37 x 60) + (100 x 70) + ... + (88 x 30) = 26,926
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}) = (55^{2}) + (37^{2}) + (100^{2}) + ... (88^{2}) = 28,623
SUM(Y^{2}) = (91^{2}) + (60^{2}) + (70^{2}) + ... (30^{2}) = 35,971
Noting 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))) / Square Root((n x SUM(X^{2})  SUM(X)^{2}) x (n x SUM(Y^{2})  SUM(Y)^{2}))
In this example, the correlation is:
r = (7 x 26,926  (409 x 485) / Square Root((7 x 28,623  409^{2}) x (7 x 35,971  485^{2}))
r = 9,883 / 23,414
r = 0.42
The two data sets have an inverse correlation of 0.42.

Benchmark For Correlation Values
A benchmark for correlation values is a point of reference that ... 
Positive Correlation
Positive correlation is a relationship between two variables ... 
Serial Correlation
Serial correlation is the relationship between a given variable ... 
Pairs Trade
A pairs trade is a trading strategy that involves matching a ... 
Intermarket Analysis
Intermarket analysis looks at related asset classes or financial ... 
Covered Interest Arbitrage
Covered interest arbitrage is a strategy where an investor uses ...

Financial Advisor
Why Market Correlation Matters
Correlation measures how assets and markets move in relation to each other, and can be used to manage risk. 
Investing
The Market Is Assessing Trump Implications
Stocks are no longer moving in unison, and active fund managers are cheering. 
Investing
Regression Basics For Business Analysis
Regression analysis is a quantitative tool that is easy to use and can provide valuable information on financial analysis and forecasting. Find out how. 
Investing
Portfolio Diversification Done Right
Diversifying your portfolio by means of different securities and asset classes is an essential approach to lower the overall risk of a portfolio. 
Investing
Investing $100 a Month in Stocks for 20 Years
Learn how a monthly investment of just $100 can help build a future nest egg using properly diversified stocks or stock mutual funds. 
Investing
Inverse ETFs Can Lift a Falling Portfolio
These funds can reduce your exposure to market risk or enhance portfolio performance. 
Managing Wealth
Does International Investing Really Offer Diversification?
Historically, international investing has worked out well for investors, but this may no longer be the case. 
Investing
Understand the Risks of Trading Inverse ETFs
Inverse ETFs sound like a great way to take advantage of market volatility. But it's important to understand how they work before you invest. 
Investing
Calculating covariance for stocks
Covariance can help you calculate how two stocks might move together and help you in building a diversified investment portfolio.

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 >> 
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 >> 
Can I use the correlation coefficient to predict stock market returns?
The correlation coefficient is a statistical measurement of the relationship between how two stocks move in tandem with each ... Read Answer >> 
How are negative correlations used in risk management?
Learn about risk management and how negative correlations between assets are used to diversify and hedge risk associated ... Read Answer >> 
How do investment advisors calculate how much diversification their portfolios need?
Learn how modern portfolio theory (MPT) can help determine a diversified mix of assets in a portfolio that is able to reduce ... Read Answer >> 
How can you find the demand function from the utility function?
Learn how the utility function can be used to derive the demand function, and how both of these concepts relate to utility ... Read Answer >>