Correlation is a statistical concept that measures the degree to which two variables are either moving in tandem or in opposition to each other.

In finance, we can use correlation to look at companies to see whether their share prices are likely to move together or move apart.

A correlation coefficient is a number between -1 and 1.

A correlation of 1 means that the two variables move perfectly in line, and if we think of that in share prices, that means the two share prices will move by exactly the same amount at exactly the same time.

A correlation of -1, however, means they move in completely opposite directions. They will move by the same amount at opposite times in different directions.

A correlation of zero means that there's no visible relationship between the two variables, so we can't really draw any conclusions there.

Why might correlation be important? Well, in the most simple case you might pick two stocks that are negatively correlated in order to over diversify your portfolio, that means that when one stock goes up in price the other will go down, and it means that you're protected from both stocks going down at the same time.

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