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Investment Term For The Day - Correlation Coefficient

Jan 11, 2022 05:12 PM
Investment Term For The Day - Correlation Coefficient Investment Terms, Africa Business Radio, Correlation Coefficient, Financial Literacy, African Podcast, Podcast in Africa, Financial mathematics

The correlation coefficient is a statistical measure of the strength of the relationship between the relative movements of two variables. The values range between -1.0 and 1.0. A calculated number is greater than 1.0 or less than -1.0 means that there was an error in the correlation measurement. A correlation of -1.0 shows a perfect negative correlation, while a correlation of 1.0 shows a perfect positive correlation. A correlation of 0.0 shows no linear relationship between the movement of the two variables.

Correlation statistics can be used in finance and investing. For example, a correlation coefficient could be calculated to determine the level of correlation between the price of crude oil and the stock price of an oil-producing company, such as Exxon Mobil Corporation. Since oil companies earn greater profits as oil prices rise, the correlation between the two variables is highly positive.

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