Correlation
Also called: correlation coefficient
A measure from −1 to +1 of how closely two things move together. It shows association, not cause.
A correlation near +1 means two things move together; near −1, in opposite directions; near 0, with no consistent straight-line link.
Correlations measured from small samples are unreliable, and correlations between investments can change sharply, often rising in a crisis.
Example
Two bank shares that usually rise and fall on the same days might have a correlation of about +0.8.
Learn more in these lessons
- Correlation and causationWhy doesn't correlation mean causation?
- DiversificationHow does diversification reduce risk, and what can't it protect against?
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