Chapter 44. Using Correlations to Summarize Relationships

  • How are monthly stock returns on Microsoft, GE, Intel, GM, and Cisco related?

Trend curves are a great help in understanding how two variables are related. Often, however, we need to understand how more than two variables are related. Looking at the correlation between any pair of variables can provide insights into how multiple variables move up and down in value together.

The correlation (usually denoted by r) between two variables (call them x and y) is a unit-free measure of the strength of the linear relationship between x and y. The correlation between any two variables is always between –1 and +1. While the exact formula used to compute the correlation between two variables isn’t ...

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