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Correlation

• Is the statistical relationship between two variables. It indicates how they move together and not necessarily casual relationship.

• A statistical measure of the relationship, if any, between two series of numbers representing data of any kind. If two series move in the same direction they are said to be positively correlated. If two series move in opposite directions, they are said to be negatively correlated.

• See: Correlation coefficient.

 
 Embedded terms in definition
 Correlation coefficient
Negatively correlated
Positively correlated
Series
 
 Referenced Terms
 Autocorrelation: Is the statistical dependency of items within a time series. This compares to Serial Correlation.The Correlation of a variable with itself over successive time intervals.

 Autocorrelation: Is the statistical dependency of items within a time series. This compares to Serial Correlation.The Correlation of a variable with itself over successive time intervals.

 Benchmark: Is the standard to measure, monitor, price or evaluate a security or derivative. The treasury market is the benchmark for the corporate, mortgage backed, international and emerging credit markets. Here, securities are priced in terms of yield pickup relative to a comparable treasury. This comparability is often in terms of maturity though duration or average life become more meaningful for securities which have option characteristics.The performance of a predetermined set of securities, for comparison purposes. Such sets may be based on published indexes or may be customized to suit an investment strategy.A comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close Correlation to the level of risk and the average duration of the portfolio's investments.

 Correlation coefficient: A standardized statistical measure of the dependence of two random variables, defined as the covariance divided by the standard deviations of two variables.A measure of the degree of Correlation or comovement between two series of numbers. The correlation coefficient can have a value from +1 (perfect positive correlation) to 1 (perfect negative correlation).

 Diversification: Dividing investment funds among a variety of securities with different risk, reward, and Correlation statistics so as to minimize unsystematic risk.Dividing investment funds among a variety of securities offering independent returns.In order to reduce risk, it is wise to own the best company in at least 10 industries, depending upon the size of your portfolio. Choose industries that are likely to have better growth than the economy as a whole.
Another way to diversify is to buy companies of various sizes in different industries. Size can be measured by the dollar figure for sales, (up to $400M = small company; above $4Billion = large company; middle-sized companies are in between.)It refers to spreading the risks. Diversification occurs when investors buy many different stocks and bonds instead of putting all of their money in a single stock. Similarly, banks can diversify their loans geographically by making loans across the globe instead of a single town.A strategy that aims to reduce risk, involving the spreading of assets across a mix of companies, investments, industries, geographic areas, maturity dates, and/or other investment categories.

 
 Related Terms
 Coefficient of correlation
Correlation coefficient
Serial correlation

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