Correlation is a statistical measure that expresses the extent to which two variables change together at a constant rate.
Correlation tells us if the two variables have a linear relationship, and the strength of that relationship.
Formula to calculate correlation.
σx is the standard deviation of variable x.
σy is the standard deviation for variable y.
Suppose the covariance of two stocks x and y is 90, calculate their correlation if their standard deviation is 5 and 3 respectively.
Therefore, their correlation is 6.