The similarity of assets, or correlation, is a statistical measure on how the two securities move in relation to each other. Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1.
- 1 indicates a strong positive relationship between securities and implies that as one security moves, either up or down, the other security will move in lockstep in the same direction.
- -1 indicates a strong negative relationship and implies that as one security moves, either up or down, the other security will move in locktep in the opposite direction.
- A result of zero indicates no relationship at all.
How to calculate?
For calculating correlations between any two assets you can use the formula below:
- is each x-value minus the mean of x (called “a” above)
- is each y-value minus the mean of y (called “b” above)
For the easiest calculating asset of correlations, you can use our calculator.
Examples of Positive Correlations
- The more time you spend running on a treadmill, the more calories you will burn.
- Taller people have larger shoe sizes and shorter people have smaller shoe sizes
- The longer someone invests, the more compound interest he will earn.
- The longer amount of time you spend in the bath, the more wrinkly your skin becomes.
- As it snows more, the sales for deicers go up.
- As you drink more coffee, the number of hours you stay awake increases.
- As a child grows, so does his clothing size.
- As her salary increased, so did her spending.
Examples of Negative Correlation
- A student who has many absences has a decrease in grades.
- As weather gets colder, air conditioning costs decrease.
- If a train increases speed, the length of time to get to the final point decreases.
- As a bikers speed increases, his time to get to the finish line decreases.
- As the slope of a hill increases, the amount of speed a walker reaches may decrease..
- The more vitamins one takes, the less likely one is to have a deficiency.
- The more iron an anemic person consumes, the less tired one may be.