Loading the player...

What is 'Positive Correlation '

Positive correlation is a relationship between two variables in which both variables move in tandem. A positive correlation exists when one variable decreases as the other variable decreases, or one variable increases while the other increases. In statistics, a perfect positive correlation is represented by 1, while 0 indicates no correlation, and negative 1 indicates a perfect negative correlation.

BREAKING DOWN 'Positive Correlation '

A perfect positive correlation means that 100% of the time, the variables move by the exact same percentage. A positive correlation can be seen between the demand for a product and the product's associated price. In situations where the available supply stays the same, the price will rise if demand increases. Additionally, gains or losses in certain markets may lead to similar movements in associated markets. As the price of fuel rises, the prices of airline tickets also rise. Since airplanes require fuel to operate, an increase in this cost is often passed to the consumer, leading to a positive correlation between fuel prices and airline ticket prices.

A positive correlation does not guarantee growth or benefit. Instead, it is used to denote any two or more variables that move in the same direction together, so when one increases, so does the other. While the correlation exists, causation may not; thus, while certain variables may move together, it may not be known why this movement occurs.

Correlation is a form of dependency, where a shift in one variable means a change is likely in the other, or that certain known variables produce specific results. A general example can be seen within complementary product demand. If the demand for vehicles rises, so will the demand for vehicular-related services, such as tires. An increase in one area has an effect on complementary industries.

Positive Correlation in Finance

A simple example of positive correlation involves the use of an interest-bearing savings account with a set interest rate. The more money that is added to the account, whether through new deposits or earned interest, the more interest that can be accrued. Similarly, a rise in the interest rate will correlate with a rise in interest generated, while a decrease in interest rate causes a decrease in actual interest accrued.

Psychology and Positive Correlation

In certain situations, positive psychological responses can cause positive changes within an area. This can be demonstrated within the financial markets, in cases where general positive news about a company leads to a higher stock price.

RELATED TERMS
  1. Negative Correlation

    A perfect negative correlation is a relationship between two ...
  2. Correlation Coefficient

    The correlation coefficient is a statistical measure that calculates ...
  3. Cross-Correlation

    Cross correlation is a measurement that tracks the movements ...
  4. Inverse Correlation

    An inverse correlation, also known as negative correlation, is ...
  5. Pairs Trade

    A pairs trade is a trading strategy that involves matching a ...
  6. Variable Rate Mortgage

    A variable rate mortgage is a type of home loan in which the ...
Related Articles
  1. Insights

    Prices of Stocks and Bonds Move More in Tandem

    Correlation between stock and bond prices in the U.S. have reached a 10-year high, reversing a broader trend of negative correlation.
  2. Trading

    Using Currency Correlations To Your Advantage

    Knowing the relationships between pairs can help control risk exposure and maximize profits.
  3. Trading

    Managing Currency Exposure In Your Portfolio

    The value of your investments is impacted by changes in global currency exchange rates. Find out how.
  4. 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.
  5. Investing

    Do Oil and Natural Gas Prices Rise And Fall Together?

    Do the prices of crude oil and natural gas affect each other? Investopedia explores price patterns and provides analysis.
  6. 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.
  7. Investing

    Why the Correlation Between the Dollar and Equities Is Weakening (SPY, UUP)

    The correlation between U.S. dollars and equities can change based on macroeconomic conditions. Understanding the causes of these changes can lead to profits.
  8. 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.
  9. Investing

    Commodity Prices And Currency Movements

    Find out which currencies are most affected by fluctuations in gold and oil prices, and improve your trading.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. How do you calculate R-squared in Excel?

    Calculate R-squared in Microsoft Excel by creating two data ranges to correlate. Use the correlation formula to correlate ... Read Answer >>
Trading Center