Correlation

Correlation simply refers to a relationship between two events...

Correlation simply refers to a relationship between two entities. For example, there is a correlation between how much you earn and how much tax you pay. In financial 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 generally cause a corresponding movement in the Asian market.

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments
State pensions

State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments

LCP launches Mothers Missing Millions campaign amid DWP state pension errors.
3 Dec 2022