1. What is Stock Correlation?

Correlation measures the relationship between two stocks' returns. A correlation coefficient of +1 indicates perfect positive correlation, -1 indicates perfect negative correlation, and 0 indicates no correlation.

2. How Does the Calculator Work?

The calculator uses the correlation formula:

Where:

• \( r \) — Correlation coefficient
• \( \text{Cov}(S1, S2) \) — Covariance between S1 and S2 returns
• \( \sigma_{S1} \) — Standard deviation of S1 returns
• \( \sigma_{S2} \) — Standard deviation of S2 returns

Explanation: The formula calculates how two stocks move in relation to each other, helping investors understand diversification benefits.

3. Importance of Correlation Analysis

Details: Correlation analysis is crucial for portfolio diversification, risk management, and identifying hedging opportunities in stock investments.

4. Using the Calculator

Tips: Enter percentage returns for both stocks as comma-separated values. Both arrays must have the same number of elements for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What does a correlation of 0.8 mean?
A: A correlation of 0.8 indicates a strong positive relationship where the stocks tend to move in the same direction.

Q2: How many data points are needed?
A: For reliable results, use at least 20-30 data points (daily, weekly, or monthly returns).

Q3: Can correlation change over time?
A: Yes, correlations between stocks can change due to market conditions, economic factors, and company-specific events.

Q4: What's the difference between correlation and causation?
A: Correlation measures association, not causation. Two stocks moving together doesn't mean one causes the other to move.

Q5: How can I use correlation in portfolio construction?
A: Combine stocks with low or negative correlations to reduce overall portfolio risk through diversification.