The magnitude of the correlation coefficient indicate the "strength" about the variables.
What is correlation?
In the financial and investing industries, correlation is a statistic which indicates the extent that two securities change in relation to one another.
Correlations are employed in advance portfolio management and are calculated as correlation coefficient, that must be between -1.0 and +1.0.
Some key features regrading correlation are-
- Within finance, this correlation can be used to compare the movements of a stock to the movement of benchmark index, like the S&P 500.
- Correlation is inextricably linked to diversification, the idea that some types of risk can be minimized by investing in non-correlated assets.
- Correlation quantifies relationship but does not reveal whether x affects y or conversely whether the association is due to a third component.
- A scatterplot may be the best way to identify correlation, especially is if variables get a non-linear but nevertheless substantial connection.
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