Investment Correlation | Financial
Investment Correlation | Financial Correlation
(1) Correlation is a relationship between two quantities, such that when one changes, the other does. If the quantities simultaneously increase or decrease in value, a positive correlation exists. If one increases as the other decreases, a negative correlation exists. For example, the resale value of an automobile and its mileage tend to be negatively correlated; the more miles on a car's odometer, the less the car is worth. In contrast, auto insurance costs and accident incidents are positively correlated; the more accidents a driver experiences, the more costly the driver's auto insurance.
(2) A measure (ranging in value from 1.00 to -1.00) of the association between a dependent variable (fund, portfolio) and one or more independent variables (index). Correlation is a measure, not necessarily of causality, but rather of the strength of a relationship. A correlation coefficient of 1.00 implies that the variables move perfectly in lockstep; a correlation coefficient of -1.00 implies that they move inversely in lockstep; and a coefficient of 0.00 implies that the variables as calibrated are uncorrelated.
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