What is the 'Pearson Coefficient'
The Pearson coefficient is a type of correlation coefficient that represents the relationship between two variables that are measured on the same interval or ratio scale. The Pearson coefficient is a measure of the strength of association between two continuous variables.
BREAKING DOWN 'Pearson Coefficient'
To find the Pearson coefficient the two variables are placed on a scatter plot. There must be some linearity for the coefficient to be calculated; a scatter plot not depicting any resemblance to a linear relationship will be useless. The closer the resemblance to a straight line of the scatter plot, the higher the strength of association. Numerically, the Pearson coefficient is represented the same way as a correlation coefficient that is used in linear regression; ranging from 1 to +1. A value of +1 is the result of a perfect positive relationship between two or more variables. Conversely, a value of 1 represents a perfect negative relationship. A zero indicates no correlation.
Practical Uses in Investing
For an investor who wishes to diversify a portfolio, the Pearson coefficient can be useful. Calculations from scatter plots of historical returns between pairs of assets such as equitiesbonds, equitiescommodities, bondsreal estate, etc., or more specific assets such as large cap equities, small cap equities and debtemerging market equities will produce Pearson coefficients to assist the investor in assembling a portfolio based on risk and return parameters. Note, however, that a Pearson coefficient measures correlation, not causation. If large cap and small cap equities have a coefficient of 0.8, it will not be known what caused the relatively high strength of association.
Who Was Karl Pearson?
Karl Pearson (1857  1936) was an English academic and prolific contributor to the fields of mathematics and statistics. Aside from the eponymous coefficient, Pearson is known for the concepts of chisquared test and pvalue, among others, and development of linear regression and classification of distributions. Pearson was the founder of the Department of Applied Statistics at University College London in 1911.

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