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DEFINITION OF 'CORRELATION'
In the world of finance, a statistical measure of how two securities move in relation to each
other. Correlations are used in advanced portfolio management.
management.

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INVERSE CORRELATION

POSITIVE CORRELATION

NEGATIVE CORRELATION

CORRELATION COEFFICIENT

BREAKING DOWN 'CORRELATION'

Correlation is computed into what is known as the correlation coefficient,
coefficient, which ranges
between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that
as one security moves, either up or down, the other security will move in lockstep, in the
same direction. Alternatively, perfect negative correlation means that if one security moves
in either direction the security that is perfectly negatively correlated will move in the
opposite direction. If the correlation is 0, the movements of the securities are said to have no
correlation; they are completely random.

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In real life, perfectly correlated securities are rare, rather you will find securities with some
degree of correlation.
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RELATED FAQS
Q: What types of assets lower portfolio variance?
A: Assets that have a negative correlation with each other reduceportfolio variance. Variance is one
measure of the volatility ... Read Full Answer >>

Q: How does being overweight in a particular sector increase risk to a portfolio?

A: An investor who is overweight in a particular sector risks a loss in value for the portfolio if there is a
downturn in that ... Read Full Answer >>

Q: How can I use risk return tradeoff to determine my risk tolerance and investment ...
A: An investor can use the risk-return tradeoff to determine what type of assets to include in a portfolio.
The risk-return ... Read Full Answer >>

Q: How does the risk of investing in the oil and gas sector compare to the broader market?
A: The oil and gas sector has unique risks, since it is exposed to fluctuations in the prices of oil and natural
gas as opposed ... Read Full Answer >>

Q: How do investment advisors calculate how much diversification their portfolios need?
A: One effective tool for investment advisers to determine the amount of diversification necessary for a
portfolio is modern ... Read Full Answer >>

Q: What level of correlation among investments will guarantee market returns but have ...
A: The efficient frontier set forth by modern portfolio theory (MPT) can provide an estimate of an
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A: RiskMetrics is a methodology that contains techniques and data sets used to calculate the value at risk
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Q: How should I interpret a negative correlation?

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A: Ceteris paribus and mutatis mutandis are Latin phrases commonly used as shorthand to explain certain
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Q: What trading strategies help investors withstand a drawdown?

A: Two primary trading strategies to help a trader withstand a drawdown are hedging and following
simple money management rules. Drawdown, ... Read Full Answer >>

Q: What does it mean if the correlation coefficient is positive, negative, or zero?

A: The correlation coefficient measures the robustness of the relationship between two variables.
Pearson's correlation coefficient ... Read Full Answer >>

Q: How can you calculate correlation using Excel?

A: Correlation measures the degree to which two variables move in relation to each other. High positive
correlations mean that ... Read Full Answer >>

Q: How is correlation used differently in finance and economics?

A: Financial correlations are drawn to better understand and improve financial activities, such as investing
or marketing. Economic ... Read Full Answer >>

Q: What's the difference between r-squared and correlation?

A: R-squared is a statistical analysis of the practical use and trustworthiness of beta (and by extension
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Q: How do you calculate r-squared in Excel?

A: R-squared is a statistical relationship between two series of events. It is also a risk measure that is used
in economics ... Read Full Answer >>

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in economics ... Read Full Answer >>

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A: In the foreign exchange (forex) market, currency valuations move up and down as a result of many
factors, including interest ... Read Full Answer >>

Q: What is the relationship between oil prices and inflation?

A: The price of oil and inflation are often seen as being connected in a cause and effect relationship. As oil
prices move up ... Read Full Answer >>

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