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Correlation
Correlation is a standardized measure of how two return series moved together, commonly ranging from -1 to +1.
Plain-English definition: Correlation is a standardized measure of how two return series moved together, commonly ranging from -1 to +1.[1]
How the term is used
A value near +1 indicates strong same-direction historical movement; a value near -1 indicates opposite movement; a value near zero indicates little linear relationship. The estimate depends on the period and return frequency.[1]
What to check before relying on it
Correlation can change during market stress and does not prove causation. It also misses nonlinear relationships and can be distorted by stale prices or mismatched trading calendars.
Example
Two assets can have low long-run correlation yet fall together during a short liquidity shock, which is exactly when an investor expected diversification to help.
Sources
- OpenStax Principles of Finance: Correlation Analysis — covariance, the correlation coefficient, its range, units, and interpretation. Accessed October 24, 2026.