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Correlation


A correlation measures the relationship between the returns of two assets. Assets that are positively correlated tend to rise and fall in price simultaneously. Assets can also have a negative correlation, meaning that when one rises in value the other declines in value.

Correlations are measured from -1 to +1, with negative numbers indicating negative correlations and positive numbers indicating positive correlations. The further from zero, the correlation the stronger it is.

Correlations can be used to compare investments or to diversify a portfolio. Highly correlated portfolios will have higher risk. Assets that have low or negative correlations can hedge one another, lowering risk.