CFA Level 2 Quantitative methods Reading 11 Correlation & Regression - Introduction to correlation

Good morning, 

Started with Quantitative methods this morning.

I came across this article from the Wall Street Journal regarding the high correlation between commodities & stocks. It states: "In the past few years, many investors have concluded that commodities like oil, corn and gold offer independent returns that can diversify away the risks of stocks. But the correlations between stocks and commodities—the extent to which their prices move together—are in many cases the highest they have been in nearly 30 years"

Getting back to the CFA curriculum:

Correlation is used to examine the relationship between two or more variables. 

Some points about correlation:

• Corr(Ri, Rj) = Cov(Ri,Rj) / σ(Ri) σ(Rj).
• Correlation measures the strenght of the linear relationship between two variables.
• Correlation has no units.
• Correlation ranges from -1 to 1
• If Corr(Ri,Rj) = 1, the random variables have perfect positive correlation, e.g. the movement of one variable results in a proportional positive movement in the other relative to its mean.
• If Corr(Ri,Rj) = -1, the random variables have perfect negative correlation, meaning that the variables move in exact opposite proportional movement. 
• If Corr(Ri,Rj) = 0, there is no linear relationship, indicating that prediction of Ri can not be made on the basis of Rj using linear methods.

 Regards

Pieter