Correlation

A measure of how two securities move relative to each other. This is depicted by a correlation coefficient, which must lie between -1 and +1.

A correlation coefficient of -1 depicts a perfect negative correlation. If two securities X and Y are perfectly negatively correlated, they move in the exact opposite direction: as one goes up, the other goes down, and vice versa. Two securities in different asset classes and different sectors could be negatively correlated.

A correlation coefficient of +1 depicts a perfect positive correlation. If two securities X and Y are perfectly positively correlated, they move in the exact same direction. As one security moves, either up or down, the other security will move in perfect synchrony. Two similar stocks in the same industry will tend to be strongly positively correlated.

A correlation coefficient of 0 implies the movements of the two securities X and Y are uncorrelated, and their movements relative to each other are completely random. In reality, it is rare to find perfectly correlated securities.