Correlation & Covariance Calculator
Analyze relationships between assets. Calculate correlation coefficients and covariance for portfolio diversification.
Correlation & Covariance Calculator
Calculate the correlation coefficient and covariance between two assets to understand their relationship and diversification potential.
Asset Returns
Results & Analysis
Correlation & Covariance Calculator FAQ
What is Correlation?
Correlation measures how two assets move in relation to each other. It ranges from -1 (perfect negative correlation) to +1 (perfect positive correlation). Zero correlation means assets move independently.
What is Covariance?
Covariance measures the directional relationship between two assets' returns. Positive covariance means assets tend to move together, while negative covariance means they move in opposite directions.
How Does Correlation Affect Portfolio Risk?
Lower correlation between assets reduces portfolio risk through diversification. Perfectly correlated assets (+1) offer no diversification benefit, while negatively correlated assets (-1) provide maximum risk reduction.
What is a Good Correlation for Diversification?
Correlations below 0.5 are generally good for diversification. Negative correlations are ideal for hedging. However, the optimal correlation depends on your risk tolerance and investment objectives.
How to Calculate Correlation from Covariance?
Correlation = Covariance / (Standard Deviation of Asset A × Standard Deviation of Asset B). This normalizes covariance to a scale of -1 to +1, making it easier to interpret and compare.
Why is Correlation Important in Portfolio Management?
Correlation helps optimize portfolio allocation and risk management. Understanding asset relationships allows investors to build portfolios that maximize returns for a given level of risk through proper diversification.
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