What does correlation refer to?

Correlation refers to the degree of relationship between two or more variables. It is a statistical measure that indicates the extent to which two variables fluctuate together. When one variable changes, correlation helps to understand how the other variable may change in response.

This concept is often quantified through correlation coefficients, which range from -1 to +1. A coefficient close to 1 implies a strong positive correlation, meaning that as one variable increases, the other also increases. Conversely, a coefficient close to -1 indicates a strong negative correlation, where one variable increases while the other decreases. A coefficient of 0 suggests no correlation.

Understanding correlation is crucial in various fields, including finance, where it can help in analyzing market trends and the relationship between different financial instruments. This understanding allows for better decision-making based on the interdependencies of variables.