A statistic that measures how much two securities move in relation to each other. It may also be used to measure the movement of a stock in relation to an index (for example, the S&P 500). This can give investors an idea of how the stock is performing in relation to the market as a whole. It measures association, but does not show what caused a variance. The correlation coefficient is measured in a range between -1.0 and 1.0, with a perfect positive correlation being 1.0. This means that when one security moves, the correlated security also moves perfectly in the same direction. And perfect negative correlation of -1.0 implies the opposite, with one security moving equally in the opposite direction as the other. For example, large-cap stocks tend to have a very high positive correlation to the S&P 500, whereas put options and their underlying stock prices will tend to have a negative correlation.
Correlation
Market Terms
We don't know everything about the markets. We're just devoted to learning. Taken from those smarter than ourselves, here's how we define Correlation.