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Asset Correlation Formula:
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Asset correlation measures the degree to which two assets move in relation to each other. It ranges from -1 (perfect negative correlation) to +1 (perfect positive correlation), with 0 indicating no linear relationship.
The calculator uses the correlation formula:
Where:
Explanation: The formula calculates how much two assets' returns move together relative to their individual volatilities.
Details: Understanding asset correlation is crucial for portfolio diversification, risk management, and optimizing investment strategies. Lower correlations between assets can help reduce overall portfolio risk.
Tips: Enter percentage returns for both assets as comma-separated values. Both arrays must have the same number of data points (minimum 2 points required for calculation).
Q1: What does a correlation of 0.7 mean?
A: A correlation of 0.7 indicates a strong positive relationship - when one asset's return increases, the other tends to increase as well, about 70% of the time.
Q2: Can correlation be negative?
A: Yes, negative correlation (-1 to 0) means assets move in opposite directions, which is beneficial for diversification.
Q3: How many data points are needed for accurate correlation?
A: Generally, more data points provide more reliable results. Minimum 20-30 data points are recommended for statistical significance.
Q4: Does correlation imply causation?
A: No, correlation only measures the strength of relationship, not causation. Two assets may be correlated due to common underlying factors.
Q5: How often should correlation be recalculated?
A: Correlations can change over time, so regular monitoring (quarterly or annually) is recommended for portfolio management.