What Is a Correlation Coefficient?

By Matthew Frankel, CFP – Updated Aug 7, 2025 at 6:36 PM

Key Points

Correlation coefficients range from -1 to +1, indicating the strength of relationships between variables.
Investors use correlation coefficients for portfolio diversification to reduce risk.
Understanding stock correlations helps manage the potential impact of market movements on investments.

The correlation coefficient is one of the most important concepts in statistical analysis, and it’s one that can be highly useful to investors.

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An infographic defining and explaining the term "correlation coefficient." — Image source: The Motley Fool

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You’ve probably noticed certain things that have a clear relationship with one another. For example, the amount of gasoline your car uses increases along with the number of miles you drive. Or, if a restaurant increases its prices, people will eat there less often.

These are simplified examples of a core statistical concept known as correlation. In simple terms, correlation describes the strength of a relationship between two variables. We can express correlation using a number known as the correlation coefficient, which can have several different applications in investing.

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Beta

A measure of a stock’s volatility compared to the overall market, showing if it tends to move more or less than the market.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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