Show Correlation Formula (Table of Contents)
Correlation is widely used in portfolio measurement and the measurement of risk. Correlation measures the relationship between two independent variables and can be defined as the degree of relationship between two stocks in the portfolio through correlation analysis. The correlation measure is known as the coefficient of correlation and is a primary measure of the risk. The correlation analysis gives us an idea about the degree & direction of the relationship between the two variables under study. The formula for correlation is equal to Covariance of return of asset 1 and Covariance of asset 2 / Standard. Deviation of asset 1 and a Standard Deviation of asset 2.
Correlation is based on the cause of effect relationship, and there are three kinds of correlation in the study, which is widely used and practiced.
Examples of Correlation Formula (With Excel Template)Let’s take an example to understand the formula calculation better. Correlation Formula – Example #1A fund manager wants to calculate the coefficient of correlation between two stocks in the debt real estate assets portfolio. Solution: Correlation is calculated using the formula given below ρxy = Cov(rx, ry) / (σx * σy)
Correlation Formula – Example #2A student wants to calculate the coefficient of correlation between two stocks in the portfolio. Solution: Correlation is calculated using the formula given below ρxy = Cov(rx, ry) / (σx * σy)
Correlation Formula – Example #3A VC fund is evaluating its portfolio, and it wants to calculate the coefficient of correlation between two stocks in the portfolio. Solution: Correlation is calculated using the formula given below ρxy = Cov(rx, ry) / (σx * σy)
ExplanationCorrelation is used in the measure of the standard deviation.
Relevance and Uses of Correlation
Correlation Formula CalculatorYou can use the following Correlation Calculator Recommended ArticlesThis is a guide to Correlation Formula. Here we have discussed how to calculate Correlation along with practical examples. We also provide a Correlation calculator with a downloadable excel template. You may also look at the following articles to learn more –
What is the formula for calculating correlation?Here are the steps to take in calculating the correlation coefficient:. Determine your data sets. ... . Calculate the standardized value for your x variables. ... . Calculate the standardized value for your y variables. ... . Multiply and find the sum. ... . Divide the sum and determine the correlation coefficient.. What is the formula for correlation and regression?Correlation quantifies the direction and strength of the relationship between two numeric variables, X and Y, and always lies between -1.0 and 1.0. Simple linear regression relates X to Y through an equation of the form Y = a + bX.
|