What Is a Negative Correlation?
Negative Correlation Definition
A negative correlation is a relationship between any two variables in which one increases while another decreases.
For example, albeit a very simplified one, a negative correlation exists between hot coffee and warmer weather.
Negative Correlation Explained
The degree to which two variables are negatively correlated with one another is called a correlation coefficient (denoted by r), and its measurement ranges from -0.1 and -1.
If a relationship were to have a correlation coefficient score of -1, then the two variables would have a perfect negative relationship.
While a score -0.1 would indicate a weak negative relationship between variables.
By squaring a relationship’s R-value, referred to as R-squared, an analyst can then determine the degree to which the variance of the two variables is related to one another.
Expressed in percent, if a R-value was equal to -.6, then the value’s R-squared would equal 36%.
Meaning that the variance in one variable could be explained by the second variable 36% of the time.
Profiting From Negative Correlations
In finance, negative correlations come in handy when attempting to diversify a portfolio.
What Is a Negative Correlation FAQs
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.