 Financial Terms Correlation

# Definition of Correlation ## Correlation

See: correlation coefficient.

## Correlation

The simultaneous change in value of two random numeric variables.

# Related Terms:

## Autocorrelation

The correlation of a variable with itself over successive time intervals.

## coefficient of correlation

a measure of dispersion that indicates the degree of relative association existing between two variables

## correlation analysis

an analytical technique that uses statistical
measures of dispersion to reveal the strength of the
relationship between variables

## 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.

## Correlation Coefficient

A measure of the tendency of two variables to change values
together

## Correlation coefficient

A statistic in which the covariance is scaled to a
value between minus one (perfect negative correlation) and plus one (perfect
positive correlation). ## Diversification

Dividing investment funds among a variety of securities with different risk, reward, and
correlation statistics so as to minimize unsystematic risk.

## Information Coefficient (IC)

The correlation between predicted and actual stock returns, sometimes used to
measure the value of a financial analyst. An IC of 1.0 indicates a perfect linear relationship between predicted
and actual returns, while an IC of 0.0 indicates no linear relationship.

## Magic of diversification

The effective reduction of risk (variance) of a portfolio, achieved without reduction
to expected returns through the combination of assets with low or negative correlations (covariances).
Related: Markowitz diversification

## R squared (R^2)

Square of the correlation coefficient proportion of the variability explained by the linear
regression model. For example, an r squared of 75% means that 75% of the variability observed in the
dependent variable is explained by the independent variable.

## R squared (R^2)

Square of the correlation coefficientthe proportion of the variability in one series that can be
explained by the variability of one or more other series.

## Tactical Asset Allocation (TAA)

An asset allocation strategy that allows active departures from the normal
asset mix based upon rigorous objective measures of value. Often called active management. It involves
forecasting asset returns, volatilities and correlations. The forecasted variables may be functions of
fundamental variables, economic variables or even technical variables.

## Value-at-Risk model (VAR)

Procedure for estimating the probability of portfolio losses exceeding some
specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.