Correlation
How closely two investments' returns move together, from −1 to +1.
Formula
Correlation = Covariance(A, B) ÷ (Std dev A × Std dev B)
How to read it
+1 moves in lockstep, 0 unrelated, −1 opposite. Two holdings above about 0.85 behave almost like one position. On the Portfolio, a pair at 0.85 or above is redundant (two positions, one bet), 0.70 or above high, below 0.30 a diversifier and below 0 a hedge.
How to use it
Find positions that are secretly the same bet, and the ones that genuinely diversify.
Limitations
Rises toward 1 in a crash, exactly when diversification is needed. On the Portfolio a holding needs at least 40 days shared with the others to appear.
In Kereon
Portfolio. Pearson correlation of daily returns over the days the holdings share; a holding without enough overlapping history is left out.
Charts · Compare. Pearson correlation of daily returns on the dates every series in the comparison shares.
Investing · price record. The symbol's daily returns against the benchmark's.
Charts · Correlation. Pearson's r of the two instruments' returns — simple or log, daily, weekly or monthly — over the lookback, measured on the periods both have a close (each pair on its own common dates). With it, a two-sided p-value from Student's t on n − 2 degrees of freedom and a 95% interval from Fisher's z.
Charts · Superchart. A rolling correlation of one-bar returns over the last 60 bars the chart and the benchmark share; scale −1 to 1.
Also called: correlation, pearson, pearson correlation, pearson's r.