What Is Correlation in Investing?
The Pearson coefficient measures linear correlation and always lies between minus one and one.
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1.What range of values can the Pearson correlation take?
The Pearson coefficient measures linear correlation and always lies between minus one and one.
2.What does a correlation of zero mean?
Zero does not mean no link of any kind, only no straight-line link.
3.Why do ice cream sales and sunburns move together?
A hidden factor behind two lines is called a confounding variable; the lines move together without one causing the other.
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Sources (5)
- Pearson correlation coefficient, Wikipedia
- Spurious relationship, Wikipedia
- Correlation, Wikipedia
- Longin & Solnik (2001), Extreme Correlation of International Equity Markets, Journal of Finance 56(2), 649-676 (Abstract bei RePEc/EconPapers)
- Eigene Rechnung: synthetische Datenreihe (Eis/Sonnenbrand)
Education only. Not financial advice.