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In the world of
finance, correlation

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is a statistical measure of how
two securities move in relation

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to each other.

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Correlation is represented
by the correlation

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coefficient, which ranges
between negative 1 and plus 1.

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When the prices
of two securities

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usually move in a
similar direction,

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the securities are
considered correlated.

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The amount of correlation
ranges from 0,

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which means no
correlation, to 1, which

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means perfect correlation.

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Perfect correlation
means the relationship

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that appears to exist
between two securities

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is positive 100% of the time.

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For example, if the price
of oil-related stocks

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increases while gas
related stocks tend

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to increase as well,
they are considered

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to have a positive correlation.

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The more predictably
they do this,

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the closer the correlation
coefficient is 2 1.

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On the other extreme, when
the prices of two securities

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consistently move in
opposite directions,

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they are negatively correlated.

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This is measured
from 0 to negative 1,

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where 0 is no correlation
and negative 1

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is perfect negative correlation

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A perfect negative
correlation means

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that the relationship
between two securities

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is opposite 100% of the time.

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For example, if the
price of small cap stocks

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increases while government
bonds tend to decrease,

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they have a negative
correlation.

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The more predictably
they do this,

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the closer the correlation
coefficient is to negative 1.

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No correlation securities
move independently

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of each other with no
apparent relationship.

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If the price of
oil, related stocks,

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and medical related stocks, move
independently of each other,

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they have 0 or no correlation.

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No correlation is important
for portfolio diversification

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when some securities
in a portfolio

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are losing money other non
correlated securities will

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likely still be gaining or
not moving at all reducing

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the investor's losses.

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