Correlation is the simple understanding that refers to two items, or things that share a mutual relationship or similarity. Correlation can be used in a wide variety of fields and industries but can be prominent in the financial and banking industry.
Fund managers will usually use a correlation coefficient as a way to measure and calculate the value of investment portfolios and are used to help manage these portfolios. Using economic and financial correlation, fund managers can also help investors diversify their portfolios.
One of the easiest examples to understand the correlation between stocks or assets is to look at that provided by Getbaraka.com:
In 2020, Uber Technologies and Lyft Inc shared the same type of positive correlation between 1 January 2020 and September 2020. What’s significant about this correlation is that both these companies had similar stock performance throughout 2020.
Even more, these companies share the same type of industry and offer the same type of products and services and one another.
In terms of economics, a positive correlation is recognized when an investment relates and responds to the market forces. Simply put, when the market goes up, investments go up, and when the market decreases, so do the corresponding investments. This occurs as these two forces are correlated to one another.
A negative correlation is the opposite of what a positive correlation is. If the market performs poorly, then certain investments will decrease compared to market profitability.
The correlation coefficient is zero, meaning there is no real relationship between the two sets.
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