What is 'Negative Correlation'
Negative correlation is a relationship between two variables in which one variable increases as the other decreases, and vice versa. In statistics, a perfect negative correlation is represented by the value 1.00, a 0.00 indicates no correlation, and a +1.00 indicates a perfect positive correlation. A perfect negative correlation means the relationship that exists between two variables is negative 100% of the time.
BREAKING DOWN 'Negative Correlation'
Negative correlation is used in statistics to measure the amount that a change in one variable can affect an opposite change in another variable. Analysts perform a regression analysis to quantify predictability of the negative relationship between the two variables. This procedure provides analysts with a calculation of Rsquared (R2), which is the statistical measure of how well one variable predicts the value of another variable. If the R2 between two separate items is 1, it means the independent variable accurately predicts the dependent variable without error. An R2 of 0 implies that the independent variable cannot predict the dependent variable. An R2 that falls between 0 and 1 measures the extent to which the independent variable predicts the dependent variable. For example, if R2 is 0.4, this implies that the independent variable can predict the dependent variable with 40% accuracy.
For example, the more time a person devotes to purchasing goods at the mall, the less money he will have in his checking account. The higher an investor's mutual fund expense ratio, the lower his investment returns. The more hours a person spends at the office, the less time he or she has for other activities. All of these variables have a negative R2.
The Importance of Negative Correlation
Negative correlation is important for any analyst, investor or person looking to diversify and hedge his bets. If an investor is able to find an investment class that moves opposite to another set of assets he is holding, he can invest in both to stabilize his portfolio. Commodities, for example, are known to move in the opposite direction of the stock market, on average. If an investor holds a portfolio with a 100% allocation of public equities, he can sell some of his stock to purchase precious metals, thus balancing his portfolio from volatility.
However, while negative correlation can be used to reduce the risk of a portfolio, it can also create a situation where an investor cannot win. If the two asset classes are perfectly negatively correlated, any gains in one class are completely offset by the other. Therefore, it is important to find two different investments that have a small, negative correlation. This way, if the relationship between stocks and commodities is 0.40, an investor can reduce, but not completely offset, his losses in times when stocks are moving downward and still earn a positive return when stocks increase in value.

Positive Correlation
Positive correlation is a relationship between two variables ... 
Correlation Coefficient
The correlation coefficient is a statistical measure that calculates ... 
Line Of Best Fit
A straight line drawn through the center of a group of data points ... 
Coefficient of Determination
A measure used in statistical model analysis to assess how well ... 
Inverse Correlation
A contrary relationship between two variables such that they ... 
Serial Correlation
The relationship between a given variable and itself over various ...

Investing
Is the Stock Correlation Strategy Effective?
The synchronized movement among stocks and markets in recent years is challenging diversification. 
Investing
What's a Sensitivity Analysis?
Sensitivity analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable). 
Trading
Using Currency Correlations To Your Advantage
Knowing the relationships between pairs can help control risk exposure and maximize profits. 
Investing
Commodities: The Portfolio Hedge
These diverse asset classes can provide downside protection and upside potential. Find out how to use them. 
Retirement
Variable Annuities: The DoItYourself Pension Plan
Variable annuities can cost more than mutual funds, but that might be worth the protection they can add to your retirement. 
Financial Advisor
Life Insurance: Variable Vs. Variable Universal
Do you know why you might need one policy versus the other? Read on to find out the difference between Variable and Variable Universal life insurance. 
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
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.

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 >> 
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 >> 
What is the correlation between U.S. stock prices and the value of the U.S. dollar?
The correlation between American stock prices and the U.S. dollar comes down to the two variables having a correlation coefficient ... Read Answer >> 
What is the difference between direct costs and variable costs?
Learn about variable costs and direct costs, how direct costs and variable costs are classified and the differences between ... 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 >>