/Correlation and Correlation Coefficient

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Correlation and Correlation Coefficient

The correlation coefficient is a statistical measure of the degree of linear relationship between two variables. The correlation coefficient may take on any value between plus and minus one. The sign of the correlation coefficient (+ , -) defines the direction of the relationship, either positive or negative.

A positive correlation coefficient means that as the value of one variable increases, the value of the other variable increases as well; as one decreases the other decreases too.

Taking the absolute value of the correlation coefficient measures the strength of the relationship. Thus a correlation coefficient of zero indicates the absence of a linear relationship and correlation coefficients of one and minus one indicate a perfect linear relationship.

The correlation can be calculated on a daily/monthly/quarterly basis.

Correlation formula

Cov =  covariance of the two variables in question
σxσx = standard deviations of the two variables in question

Available also as the correlation chart.

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