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The correlation coefficient is a statistical measure that quantifies the strength and direction of the relationship between two variables. It ranges from -1 to +1. A coefficient of +1 indicates a perfect positive relationship (both variables move in the same direction), -1 indicates a perfect negative relationship (they move in opposite directions), and 0 means there is no correlation. In finance, correlation coefficients are used to assess the relationship between different assets, helping investors manage risk and diversify portfolios.
If the correlation coefficient between two stocks is +0.9, they tend to move in the same direction, while a coefficient of -0.4 suggests they often move in opposite directions.
• Measures the strength and direction of a relationship between two variables.
• A value of +1 indicates perfect positive correlation, -1 indicates perfect negative correlation, and 0 means no correlation.
• Useful for portfolio diversification and risk management.
A correlation of 0.7 indicates a strong positive relationship, meaning the two variables tend to move in the same direction most of the time.
It is used to evaluate how different assets move relative to each other, helping investors diversify their portfolios and reduce risk.
A negative correlation means the variables move in opposite directions, with one increasing while the other decreases.
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