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.

correlation-example

How to calculate?

For calculating correlations between any two assets you can use the formula below:

correlation-formula

Where:

  • correlation-formula-x is each x-value minus the mean of x (called “a” above)
  •  correlation-formula-y 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

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.