- Correlation is a statistic that measures the degree to which two variables change relative to each other.
- In finance, correlation can measure the movement of a stock against a benchmark index such as the S&P 500.
- Correlation is closely related to diversification, the concept that certain types of risk can be mitigated by investing in uncorrelated assets.
- Correlation measures association, but does not indicate whether x causes y or vice versa, or whether the association is caused by a third factor.
- Correlation is easiest to determine with a scatterplot, especially if the variables have a non-linear but still strong correlation.