Stock Correlation
Learning about stock correlation helps traders manage their portfolios more appropriately. Regardless of your
trading strategy and whether you are looking to diversify your positions or find alternate stocks to leverage
your view, it is very important to keep in mind the correlation between various stocks and their shifting trends.
Stock Correlation is the statistical measure of the relationship between two stocks. The correlation coefficient
ranges between -1 and +1. A correlation of +1 implies that the two stocks will move in the same direction 100% of
the time. A correlation of -1 implies the two stocks will move in the opposite direction 100% of the time. A
correlation of zero implies that the relationship between the stocks is completely random. Correlations do not
always remain stable and can even change on a daily basis.
Correlation analysis can help you to diversify your
positions. Imperfect correlation between two different stocks allows for more diversification and marginally lower risk.
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