Correlation Source

As discussed on page 109, the correlation between two returns is the covariance between the two returns divided by the product of their standard deviations. In other words, it is taking the covariance of two securities and scaling it down to -1 < x < 1. For example, it's probably safe to assume that a baseball team's payroll is positively correlated with it's winning percentage (as shown here), or that the number of students studying in the library is slightly positively correlated with the temperature.

page revision: 1, last edited: 15 Nov 2007 01:52