Glossary

Correlation is a statistical measure that shows the strength and direction of the relationship between two variables. In finance, it is often used to assess how different assets or asset classes move in relation to one another.

The correlation coefficient ranges from -1 to 1. A positive correlation (closer to 1) indicates that the variables tend to move in the same direction, while a negative correlation (closer to -1) means they move in opposite directions. A correlation close to 0 implies little or no relationship between the variables. 📊

For example, stocks and bonds often have a low or negative correlation, meaning that when stock prices rise, bond prices may fall, and vice versa.

Fun fact: Harry Markowitz, the Nobel Prize-winning economist, introduced the concept of correlation into modern portfolio theory, emphasizing the importance of diversification to reduce overall portfolio risk. 🏆💡