[kawr-uh-ley-shuh
n, kor-] 
| 1. | mutual relation of two or more things, parts, etc. |
| 2. | the act of correlating or state of being correlated. |
| 3. | Statistics. the degree to which two or more attributes or measurements on the same group of elements show a tendency to vary together. |
| 4. | Physiology. the interdependence or reciprocal relations of organs or functions. |
| 5. | Geology. the demonstrable equivalence, in age or lithology, of two or more stratigraphic units, as formations or members of such. |
| cor·re·la·tion (kôr'ə-lā'shən, kŏr'-) n.
[Medieval Latin correlātiō, correlātiōn- : Latin com-, com- + Latin relātiō, relation, report (from relātus, past participle of referre, to carry back; see relate).] cor're·la'tion·al adj. |
Correlation
In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management.
Investopedia Commentary
Correlation is computed into what is known as the correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation co-efficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities is said to have no correlation, it is completely random. If one security moves up or down there is as good a chance that the other will move either up or down, the way in which they move is totally random.
In real life however you likely will not find perfectly correlated securities, rather you will find securities with some degree of correlation. For example, the performance of two stocks within the same industry is strongly positively correlated although it may not be exactly +1.
Related Links
The Dangers of Over-Diversification
Financial Concepts
Asset Allocation Strategies
See also: Correlation Coefficient, Covariance, Diversification, Modern Portfolio Theory, Portfolio Management, Portfolio Manager, Standard Deviation
Also spelled: co-relation
correlation