What is Correlation?

Besides not being causation, many pedantically smart laymen don’t know what correlation is. I’m here to fix that with a mathematical, an intuitive explanation and a brief philosophical comment.

Intuitive Explanation

Correlation is a quantitative measure of how well the highs line up with the highs and the lows line up with the lows between two arrays. Correlation will always be between -1 and 1, inclusively. A correlation of 1 indicates a linear, positive relationship between two variables. A correlation of zero indicates no correlation. A correlation of negative one indicates a perfect, negative relationship.

Mathematical Definition

This value can be computed in Excel through the CORREL() function, but stepping into the formula helps enhance the understanding. Feel free to skim over this part to the applications and philosophy sections. Mathematically, correlation can be computed as follows: Continue reading →