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# correlation for the uninitiated

Discussion in 'Trading' started by aPismoClam, Sep 14, 2006.

1. ### aPismoClam

let's say the correlation of B to A is 0.4, according to Bloomberg.

is either following statement a correct interpretation of this infomation:

"B will move in the same direction of A 4 times out of ten;"

"B will move in the same direction of A with a magnitude of n*A 4 times out of ten;"

or is there a better way to describe it?

Thanks.

2. ### horribilicus

Here is an example that has exactly ten data points. The correlation coefficient is 0.408. In the first seven rows, A and B are equal. In the final three rows, A and B are not equal.

These might represent the daily price changes of Asset A and Asset B, or perhaps the trade profits of System A and System B, or possibly the daily weight gains and weight losses of Patient A and Patient B.

3. ### ChaosNSX

lol I do not even know where to move this one.

4. ### rosy2

first you correlate based on returns not levels. you can then say that 40% of a move is reflected in the other instrument

5. ### Bitstream

move it to trollgrob's velocity shite, that would do fine.

6. ### ChaosNSX

I heard that forum section is under debate for future implementation

7. ### Deebee230

A correlation has an R-squared, which is the strength of the correlation (the closer to one the better), and then the dependent variables have a coefficient which measures the average change in the independent variable based upon a change in the dependent variable.

The statement that you made sounds to me like the r-squared or adjusted r-squared are what are being described, and so that would be interpreted as B and A moving together 40% of the time. Your second statement would be correct if you meant n* to be the coefficient, or as you stated, the magnitude of the change.

8. ### trom

Keep in mind correlation does not imply causation. There might be another variable in play.

9. ### aPismoClam

lol wtf is that supposed to mean?

I agree, there must be other threads that are worthy of your moderation.

cya.

10. ### aPismoClam

bang -- a spot on answer. thank you.

#10     Sep 18, 2006
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