Correlation Analysis

Correlation measures how two assets move together. It ranges from -1 to +1:

• +1: Move perfectly together
• 0: No relationship
• -1: Move in opposite directions

Calculating Correlation

Correlation Matrix

Diversification Analysis

Portfolio Risk with Correlation

Practice: Analyze Correlations

Key Takeaways

• Correlation ranges from -1 (opposite) to +1 (together)
• Low correlation = better diversification
• Portfolio volatility < sum of parts when correlation < 1
• Negative correlation provides the best hedge
• Check correlations across different sectors

This completes the core EDA module! Next: Data Visualization.