Correlation Coefficient

The correlation coefficient is a statistical measure that quantifies the strength and direction of the relationship between two variables. It ranges from -1 to +1. A coefficient of +1 indicates a perfect positive relationship (both variables move in the same direction), -1 indicates a perfect negative relationship (they move in opposite directions), and 0 means there is no correlation. In finance, correlation coefficients are used to assess the relationship between different assets, helping investors manage risk and diversify portfolios.

Example

If the correlation coefficient between two stocks is +0.9, they tend to move in the same direction, while a coefficient of -0.4 suggests they often move in opposite directions.