Glossary entry
Correlation measures how two series tend to move together over a specified sample. A correlation coefficient commonly ranges from minus one to plus one, describing negative, absent linear, or positive association. Investment analysis usually examines returns rather than price levels, and the chosen time frame, sampling frequency, and unusual observations can materially change the estimate.
Illustrative example
Two assets with positive return correlation often move in the same direction, while a lower correlation can reduce some portfolio variability when combined in suitable weights.
What to consider
Correlation is not causation and can change during stress. A historical estimate does not guarantee a hedge or diversification benefit will persist.
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