While correlation studies how two entities relate to one another, a correlation coefficient measures the strength of the relationship between the two variables. Related: A Guide to Scatter Plots Types of correlation coefficients In other words, as one variable moves one way, the other moved in another unrelated direction. Zero or no correlation: A correlation of zero means there is no relationship between the two variables. This means the two variables moved in opposite directions. Negative correlation: A negative correlation is -1. This means the two variables moved either up or down in the same direction together. Positive correlation: A positive correlation would be 1. To understand how correlation works, it's important to understand the following terms: It's important to understand that correlation does not mean the relationship is causal. In some cases, you might have predicted how things will correlate, while in others, the relationship will be a surprise to you. Correlation can be used for various data sets, as well. In other words, it's how two variables move in relation to one another. Related: Your Guide to Careers in Finance What is correlation?Ĭorrelation refers to the statistical relationship between two entities. In this article, we define the various types of correlation and explain how to calculate it. Calculating correlation is especially helpful if you're an investment manager or analyst. All in all, knowing the correlation between two variables can help you make decisions that could positively impact your business. Though there was a causal relationship in this circumstance, it's important to note that won't always be the case. For example, if you own a bakery, you might decide you'll make more coconut maple donuts on Fridays based on the correlation between coconut maple donut demand and the day of the week. Understanding and analyzing various correlations can be beneficial across different industries.
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