Coefficient of Correlation

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Coefficient of Correlation

A measure of how one variable interacts with another.

A stock that has a correlation coefficient of 1 with the stock market has a 100% correlation with the stock market. If the stock market goes up 20% you can expect your stock to go up 20%. If it has a correlation coefficient of -1, it means that if the stock market goes up by 20% your stock will go down 20%. If your stock has a correlation of 0, that means the movement of the stock market has no effect on the price of your stock. The correlation coefficient tells you if changes in one item will predict changes in another.

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