Correlation

Correlation simply refers to a relationship between two events. For example, there is a correlation between how much you earn and how much tax you pay. In finance terms, it generally describes the extent to which the prices of two different assets tend to move up and down together. If one moves and the other does too, in the same direction, they are said to have positive correlation. If they move in perfect unison, they are perfectly positively correlated, and have a ‘correlation coefficient’ of +1. Assets are perfectly negatively correlated when, for every point one goes up, the other goes down by an identical percentage. The correlation coefficient is then -1. A correlation coefficient of 0 means that there is no relationship at all. Correlation generally occurs when events in one area have an obvious influence on another. For example, a change in consumer confidence has a relationship with high-street spending and so will be correlated to the share prices of retailing firms. In the same way, if an Asian economy is perceived as being dependent on the US economy, any movement in the US market will cause a corresponding movement in the Asian market.

Merryn

Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.