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.

By putting money into investments that tend to perform oppositely under the same economic conditions, stocks and bonds for example, an investor can remain profitable under a variety of conditions.

What is a Negative Correlation FAQs

A negative correlation, is a relationship between any two variables in which one increases while another decreases.
In finance, negative correlations come in handy when attempting to diversify a portfolio.
By putting money into investments that tend to perform oppositely under the same economic conditions, stocks and bonds for example, an investor can remain profitable under a variety of conditions.
A negative correlation exists between hot coffee and warmer weather.