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.

CrossCorrelation
Cross correlation is a measurement that tracks the movements ... 
Current Index Value
Current index value is the most current value for the underlying ... 
Line Of Best Fit
The line of best fit is an output of regression analysis that ... 
Variable CostPlus Pricing
Variable costplus pricing is a pricing method in which the selling ... 
Random Variable
A random variable is a variable whose value is unknown or a function ... 
Variability
Variability is the extent to which data points in a statistical ...

Investing
What's the Correlation Coefficient?
The correlation coefficient is a measure of how closely two variables move in relation to one another. If one variable goes up by a certain amount, the correlation coefficient indicates which ... 
Insights
Prices of Stocks and Bonds Move More in Tandem
Correlation between stock and bond prices in the U.S. have reached a 10year high, reversing a broader trend of negative correlation. 
Trading
Using Currency Correlations To Your Advantage
Knowing the relationships between pairs can help control risk exposure and maximize profits. 
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. 
Investing
Consider These Facts Before Choosing a Variable Annuity
Variable annuities do have some benefits, but there are some disadvantages and misconceptions to take into account as well. 
Investing
Are You Buying Annuities Or Mutual Funds?
Understanding the costs and risks in investment whether annuities or mutual funds should be the only real requirement for your clients. Find out why. 
Retirement
Update Your Variable Annuity With Section 1035
Thanks to a special tax code clause, you can surrender a variable annuity without paying income tax. 
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
5 Investments You Should Think Twice About
Some investments may sound good on paper but they can end up doing more harm than good to your portfolio in the long run. 
Investing
How does crude oil affect gas prices?
Understand the origins of oil, how its price is determined and where its correlation with gas prices falls in the global economy.

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 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 >> 
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 >> 
How is correlation used in modern portfolio theory?
Modern portfolio theory looks for correlation between expected returns and expected volatility of different investments. Read Answer >> 
Do production costs include all fixed and variable costs?
Learn more about fixed and variable costs and how they affect production costs. Understanding how to graph these costs can ... Read Answer >>