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correlation coefficient

The correlation coefficient is a statistic that measures how closely two variables are related. A statistical measure of the extent to which variations in one variable are related to variations in another.

The values of the correlation coefficient can range from -1 to 1. A correlation coefficient of -1 describes a perfect negative, or inverse, correlation, with values in one series rising as those in the other decline and vice versa. A coefficient of 1 shows a perfect positive correlation or a direct relationship. A correlation coefficient of 0 means there is no linear relationship.

Correlation coefficients are used in science and finance to assess the degree of association between two variables, factors, or data sets. For example, since high oil prices are favorable for crude producers, one might assume the correlation between oil prices and forward returns on oil stocks is strongly positive. Calculating the correlation coefficient for these variables based on market data reveals a moderate and inconsistent correlation over lengthy periods.


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