Quick Definition

Correlation in finance measures the degree to which two securities move in relation to each other, indicating how investments might behave under similar market conditions.

Formula

Examples

• 1If stock A and stock B have a high positive correlation, when stock A's price increases, stock B's price is likely to increase as well.
• 2A negative correlation between gold and the stock market often means that when stocks go down, gold prices might rise, serving as a hedge.
• 3Correlation between currency pairs in Forex trading can help traders manage risk and develop strategies.
• 4Diversified investment portfolios often include assets with low correlations to each other to reduce risk.

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