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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.

Notes:

Correlation is computed into what is known as the correlation 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 by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities is said to have no correlation, it is completely random. If one security moves up or down there is as good a chance that the other will move either up or down, the way in which they move is totally random.

In real life however you likely will not find perfectly correlated securities, rather you will find securities with some degree of correlation. For example, the performance of two stocks within the same industry is strongly positively correlated although it may not be exactly +1.

See also: Correlation Coefficient, Covariance, Diversification, Modern Portfolio Theory, Portfolio Management, Portfolio Manager, Standard Deviation

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Correlation

Statistical measure of the degree to which the movements of two variables (stock/option/convertible prices or returns) are related. See: Correlation coefficient.

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correlation

The relationship between two variables during a period of time, especially one that shows a close match between the variables' movements. For example, all utility stocks tend to have a high degree of correlation because their share prices are influenced by the same forces. Conversely, gold stock price movements are not closely correlated with utility stock price movements because the two are influenced by very different factors. The concept of correlation is frequently used in portfolio analysis. See also serial correlation.