# Correlation

Correlation represents how any two variables move together. Without going into its mathematical derivation, let’s discuss how correlation is used and interpreted in stock market. The value of correlation always lie between -1 and + 1 (-100% to 100%). If one were to declare that there is 80% correlation between rains in Mumbai and India beating Pakistan in a cricket match, what does it represent? It tells us that out of 100 cricket matches when India beat Pakistan, 80 times it simultaneously rained in Mumbai. Correlation number indicates nothing more or nothing less. So when we say that correlation between Stock A and Stock B is 80%, it means that out of 100 times when stock price of A increases, stock price of B will increase 80 times. The reverse can also be true that out of 100 times when stock price of A decreases, stock price of B will decrease 80 times. Thus correlation tells us what’s the probability of increase in stock price of B, when stock price of A has increased or what’s the probability of decrease in stock price of B, when stock price of A has decreased. Please remember correlation doesn’t tell anything about the extent of expected movement in a stock, based on movement in another stock.

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