Portfolio Diversification
Understanding correlation helps in creating diversified portfolios by:
- Identifying assets that move differently
- Reducing overall portfolio risk
- Optimizing asset allocation
Understanding Positive Correlation in Financial Markets
Discover how assets move together in financial markets and leverage this knowledge for better investment decisions.
What is Positive Correlation?
In financial markets, positive correlation describes the tendency of two assets or variables to move in the same direction. When two assets have a positive correlation:
- They tend to increase in value together
- They tend to decrease in value together
- The strength of their relationship is measured from 0 to +1
- A correlation of +1 indicates perfect positive correlation
Calculate Correlation Coefficient
Enter historical prices or returns
Enter historical prices or returns
Real Market Examples
S&P 500 vs Gold Correlation
EUR/USD vs GBP/USD Correlation
Applications in Finance
Risk Management
Correlation analysis is crucial for:
- Hedging strategies development
- Risk exposure assessment
- Portfolio stress testing
Technical Analysis
Pearson Correlation Coefficient Formula
ρ = Σ((x - μx)(y - μy)) / (σx σy)
Where:
ρ = correlation coefficient
x, y = the variables
μx, μy = their means
σx, σy = their standard deviations
Further Reading
Related Topics
- Negative Correlation in Markets
- Portfolio Theory and Diversification
- Risk-Adjusted Returns
- Market Beta and Systematic Risk
Advanced Concepts
- Time-Varying Correlations
- Correlation vs. Causation
- Non-linear Relationships
- Correlation in Different Market Conditions