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In the financial markets, correlation is a statistical measure that indicates the extent to which the prices of different assets move together. A positive correlation means that the prices of two assets tend to move in the same direction, while a negative correlation means that the prices of two assets tend to move in opposite directions.
Correlation is typically expressed using a correlation coefficient, which has a value between -1 and +1.
When two underlyings are positively correlated—meaning they move in the same direction—the correlation will range between somewhere 0 and +1. When two securities are negatively correlated—meaning they move in opposite directions—the correlation will range between -1 and 0.
If no correlation exists between two securities, then the relationship is usually described as "zero" correlation. And if a correlation is exactly -1 or +1, it is generally referred to as a "perfect negative correlation" or "perfect positive correlation."
Aside from those categorizations, correlations can also be characterized as weak, moderate, semi-strong, or strong—depending on the degree to which two (or more) underlyings are linked.
For example, 0.15 might be considered a "weak positive correlation," whereas 0.90 might be considered a "strong positive correlation." On the other hand, -0.50 might be considered "moderate negative correlation," while -0.85 might be referred to as "strong negative correlation."
An understanding and awareness of correlation can provide investors and traders with important insight into movement in the financial markets—whether that be the relationship between different asset classes, or the relationship between underlyings within the same asset class.
When two underlyings are positively correlated—meaning they move in the same direction—the correlation will range between somewhere 0 and +1.
If a correlation is exactly +1, it is generally referred to as a "perfect positive correlation."
Aside from those categorizations, correlations can also be characterized as weak, moderate, semi-strong, or strong—depending on the degree to which two (or more) underlyings move together.
For example, 0.15 might be considered a "weak positive correlation," whereas 0.90 might be considered a "strong positive correlation."
The main types of correlation are positive and negative correlation.
When two underlyings are positively correlated—meaning they move in the same direction—the correlation will range between somewhere 0 and +1. When two securities are negatively correlated—meaning they move in opposite directions—the correlation will range between -1 and 0.
However, if no correlation exists between two securities (0.00), then the relationship is usually described as "zero" correlation.
And if a correlation is exactly -1 or +1, it is generally referred to as a "perfect negative correlation" or "perfect positive correlation."
Aside from those categorizations, correlations can also be characterized as weak, moderate, semi-strong, or strong—depending on the degree to which two (or more) underlyings move together.
In the financial markets, correlation is a statistical measure that indicates the extent to which the prices of different assets move together. A positive correlation means that the prices of two assets tend to move in the same direction, while a negative correlation means that the prices of two assets tend to move in opposite directions.
A positive correlation between two assets implies that when the price of one asset increases, the price of the other asset is likely to increase as well. For example, stocks of companies in the same industry or sector often share a positive correlation, meaning that when one stock goes up in value, the other stocks in the sector tend to go up as well.
On the other hand, a negative correlation between two assets means that when the price of one asset increases, the price of the other asset is likely to decrease. For example, interest rates share a strong negative correlation with bond prices. When interest rates rise, existing bonds typically fall in value, and when interest rates fall, existing bonds tend to increase in value.
In the financial markets, correlation is a statistical measure that indicates the extent to which the prices of different assets move together. A positive correlation means that the prices of two assets tend to move in the same direction, while a negative correlation means that the prices of two assets tend to move in opposite directions.
Correlation is a statistical measure, and isn’t necessarily good or bad.
Correlation simply reports on the extent to which the prices of different assets move together.
An understanding and awareness of correlation can provide investors and traders with important insight into movement in the financial markets - whether that be the relationship between different asset classes, or the relationship between underlyings within the same asset class.
Correlation is typically expressed using a correlation coefficient, which has a value between -1 and +1.
When two underlyings are positively correlated—meaning they move in the same direction—the correlation will range between somewhere 0 and +1.
Aside from those categorizations, positive correlations can also be characterized as weak, moderate, semi-strong, or strong—depending on the degree to which two (or more) underlyings move together.
In the case of gold and silver, the long-term average correlation between these two precious metals is roughly 0.89, which is why their relationship is typically characterized as a strong, positive correlation.
If a correlation is exactly +1, it is generally referred to as a "perfect positive correlation."
In the context of financial markets, a correlation coefficient of 1.0 between two assets means that they have a perfect positive correlation, and their prices move in the same direction all the time.
For example, if two stocks from the same sector had a correlation coefficient of 1.0, that would indicate that when one stock moves up or down, the other stock will move up or down by the same amount.
A correlation coefficient of 1.0 is rare in real-world financial markets since most assets are affected by multiple factors and events that can cause their prices to fluctuate independently of each other.
However, a high correlation coefficient, such as 0.8 or 0.9, may indicate a strong positive correlation between two assets, meaning that they tend to move together most of the time, even though there may be some deviations from this pattern
When two underlyings are positively correlated—meaning they move in the same direction—the correlation will range between somewhere 0 and +1.
If a correlation is exactly +1, it is generally referred to as a "perfect positive correlation."
Aside from those categorizations, correlations can also be characterized as weak, moderate, semi-strong, or strong—depending on the degree to which two (or more) underlyings move together.
For example, 0.15 might be considered a "weak positive correlation," whereas 0.90 might be considered a "strong positive correlation."
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