Correlation
A measure from -1 to +1 summarizing the direction and strength of co-movement between two variables.
Plain languagePractical exampleConnected reading
01
What is it?
A measure from -1 to +1 summarizing the direction and strength of co-movement between two variables.
02
Why does it matter?
It is used to understand diversification, hedging and portfolio risk.
03
How should it be read?
Specify the window, frequency, currency and exceptional regime changes.
04
Common mistake
Mistaking correlation for causation or a stable future relationship.
A simple example
A +0.8 correlation means two series mostly moved together historically; it does not guarantee the future.