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What Is the Correlation Coefficient?

The correlation coefficient measures how closely the price movements of two assets (securities, indices, etc.) tend to move in the same direction, expressed as a number from −1 to +1.

  • Close to +1: the two assets tend to move in the same direction
  • Close to 0: there is no clear relationship between the two assets' price movements
  • Close to −1: the two assets tend to move in opposite directions

Relationship to diversification

Combining assets with a low (or negative) correlation raises the likelihood that one asset holds up or even rises when the other falls, which is expected to reduce the overall size of portfolio swings. It is one of the reference metrics used when considering diversification.

Points to keep in mind

The correlation coefficient is a statistical measure calculated from past price data, and it does not guarantee that the same relationship will hold in the future. During periods of broad market turmoil, assets that are normally considered to have low correlation can sometimes decline together at the same time.

This article is provided for general informational purposes only and does not recommend or solicit the purchase or sale of any specific investment method or security. Final investment decisions are your own responsibility.

Frequently Asked Questions

If I combine assets with a negative correlation, can I avoid losses?
It can be expected to reduce the size of overall price swings, but it does not eliminate the possibility of a loss entirely. This is a tendency based on past data and does not guarantee future outcomes.
How can I find the correlation coefficient between assets?
It is sometimes calculated and published by financial data services or analysis tools. Keep in mind that the figure can vary depending on the calculation period used.

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