UK Accounting Glossary
A correlation coefficient is a numerical, descriptive measure of the strength of the linear relationship between two variables. Values for the correlation coefficient range between -1 and +1, with a correlation coefficient of +1 indicating that the two variables have a perfect, upward-sloping (+) linear relationship and a correlation coefficient of -1 showing that the two variables are perfectly related in a downward-sloping, (-) linear sense. A correlation coefficient of 0 demonstrates that the variables have no relationship, and are independent. A correlation coefficient is determined through statistical analysis of sample data as it is fitted to a modelled linear equation. For investors, knowing a correlation coefficient can be useful in the following way: If one finds that the S&P 500 (variable x) has a 0.85 correlation coefficient with regards to their investment fund’s average returns (variable y), the investor can expect a pretty strong positive relationship between gains in the S&P and his/her portfolio. If the correlation coefficient were -0.85, the investor could expect to see his/her portfolio lose value as the S&P gains.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Correlation Coefficient are sourced/syndicated and enhanced from:
This glossary post was last updated: 4th February 2020.