Return Correlation Calculator
Paste two lists of period returns and get their Pearson correlation — how tightly two assets move together, the heart of diversification.
How it works
r = Σ(A−Ā)(B−B̄) ÷ √[ Σ(A−Ā)² · Σ(B−B̄)² ]
Correlation measures how two assets’ returns move relative to each other, on a scale from −1 (perfect opposites) through 0 (unrelated) to +1 (lockstep). It is the raw material of diversification: pairing assets with low or negative correlation reduces the swings of the combined portfolio without necessarily lowering its return. Correlations are not fixed, though — in market panics many assets move together and correlations drift toward 1, which is exactly when diversification is needed most.
Worked example
Asset A returns 5, −2, 3, 4, −1 percent and Asset B returns 4, −1, 2, 5, 0. Their averages are 1.8% and 2.0%. Summing the cross-products gives 30.0 against √(38.8 × 26) ≈ 31.76, so r ≈ 0.945 — a strong positive correlation, meaning these two provide little diversification for each other.
Frequently asked questions
What does a correlation of −1, 0, or +1 mean?
+1 means the two assets move in perfect lockstep, −1 means they move exactly opposite, and 0 means their movements are unrelated. Values in between show the strength and direction of the relationship.
What correlation is good for diversification?
Lower is better. Assets with correlations below about 0.3 — and especially negative ones — offset each other’s swings, which is what smooths a portfolio’s ride. Two holdings correlated near +1 give you almost no diversification benefit.
Does low correlation guarantee lower risk?
It reduces risk under normal conditions, but correlations can spike toward 1 during crises when nearly everything falls together. Diversification helps most of the time, yet it is not a guarantee in the worst market stress.
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Educational estimate, not investment advice. Trading involves risk of loss.