What is correlation coefficient?
A term used in statistics to ascertain how closely two variables move in relation to one other. In a positive correlation, the value of the variables increases or decreases in tandem, while in a negative correlation, the value of one variable rises as the other drops.
Where have you heard about correlation coefficient?
You might not have heard of the term itself, but it can be applied to numerous everyday situations. For instance, the more time you spend running, the more calories you’ll burn. That’s positive correlation. But the further you run, the slower the pace might be. That’s negative correlation.
What you need to know about correlation coefficient...
The values of correlation coefficients are always between -1 and +1. If a correlation is greater than 1 or less than -1, there’s something wrong with the calculation.
A correlation of -1 indicates a perfect negative correlation, while a correlation of +1 shows a perfect positive correlation, where two variables are exactly related.
For investors, correlation coefficient can be a useful measurement. It can help you determine how well a fund is performing compared to its benchmark index, or how it’s faring in relation to another fund.