Correlation

Correlation is a statistical measure that describes the relationship between the movements of two variables, often used in finance to assess how different assets move in relation to each other. Correlation is measured on a scale from -1 to +1, where +1 indicates perfect positive correlation (the assets move in the same direction), 0 indicates no correlation, and -1 indicates perfect negative correlation (the assets move in opposite directions). Understanding correlation helps investors diversify their portfolios and manage risk.

Example

If stock A and stock B have a correlation of +0.8, it means that they tend to move in the same direction, while a correlation of -0.5 suggests that they move in opposite directions half the time.