Finance Definition
Correlation Coefficient
📈 Investing
intermediate

Quick Definition

The correlation coefficient is a statistical measure that calculates the strength and direction of a linear relationship between two variables.

Formula

r = Σ((x - mean x) * (y - mean y)) / (sqrt(Σ(x - mean x)^2) * sqrt(Σ(y - mean y)^2))

Examples

  • 1Stocks and bonds often have a negative correlation, meaning when stocks go up, bonds tend to go down.
  • 2In portfolio management, finding assets with low or negative correlations can help in diversifying and reducing risk.
  • 3Currency pairs in Forex trading, like EUR/USD and USD/JPY, may show correlation, influencing trading strategies.

Tags

statisticsportfolio-managementrisk-analysisinvestment-strategyfinancial-analysis
Quick Info
Category:Investing
Difficulty:intermediate
Last Updated:6/18/2025