How Do You Calculate Correlation Between Stocks?
The purpose of calculating a correlation coefficient between stocks, or between a stock and the market, is to find the strength of the linear association between two variables. The correlation coefficient will range from +1 to -1 to indicate whether the relationship is positive or negative. A correlation coefficient of 1 shows a perfect correlation and a correlation coefficient of 0 shows no correlation.This statistical measure can be very easily calculated using an Excel spreadsheet. Several Internet sites offer online calculators. There are three steps involved in doing the calculation manually. Count how many values you want to use in your calculation. This would be a time value: for example, one year. If you downloaded the closing prices for the stocks you are comparing for the end of each month for one year, your value N would be 12. X would be the data for the first stock and Y would be the data for the second stock. Find the sums of X, Y, XY, X squared and Y squared. You are sum
