1. What Is Stock Correlation?

Correlation measures the relationship between two UK stocks' returns, ranging from -1 (perfect negative correlation) to +1 (perfect positive correlation). A correlation of 0 indicates no linear relationship.

2. How Does The Calculator Work?

The calculator uses the correlation formula:

Where:

• \( r \) — Correlation coefficient
• \( Cov(S_1, S_2) \) — Covariance between Stock 1 and Stock 2 returns
• \( \sigma_{S_1} \) — Standard deviation of Stock 1 returns
• \( \sigma_{S_2} \) — Standard deviation of Stock 2 returns

Explanation: The formula calculates how two stocks move together relative to their individual volatility.

3. Importance Of Correlation Analysis

Details: Correlation analysis helps UK investors diversify portfolios, manage risk, and understand how different stocks might perform under various market conditions.

4. Using The Calculator

Tips: Enter percentage returns for two UK stocks as comma-separated values. Ensure both stocks have the same number of data points for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What does a high positive correlation mean?
A: A high positive correlation (close to +1) means the stocks tend to move in the same direction.

Q2: What does a negative correlation indicate?
A: Negative correlation (close to -1) means the stocks tend to move in opposite directions.

Q3: How many data points are needed?
A: For reliable results, use at least 20-30 data points (e.g., monthly returns over 2+ years).

Q4: Does correlation imply causation?
A: No, correlation only measures association, not causation between stock movements.

Q5: How often should correlation be recalculated?
A: Correlations can change over time, so recalculate periodically (e.g., quarterly or annually).