Introduction to Personal Investing

The Basics

What is “correlation”?

Using historical returns on individual investment choices, you can see if two investments move in the same way, using various statistical analysis methods. If two stocks are 100% correlated over some time period, this means they move exactly the same way, given some event or market condition. If they are 50% correlated, then approximately half the time, over some period of time that is analyzed, the two stocks move in the same way, either up or down or even flat, with no change. If the correlation is –50% between the pair of investments, it means that they are moving in opposite directions, so as one goes up, the other goes down. As you build a diverse portfolio of investments, it is generally accepted that good investors, over time, find and invest in different classes whose returns do not move in the same or similar fashion.


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