CAIA Chapter 5: Correlation, Alternative Returns and Performance Measurement

is a measure of the degree or tendency of the two variables to move in relationship with each other. If 2 assets tend to move in the same direction, then they are said to be positively correlated, and they will have a positive covariance.

Like covariance it measures the degree of association between two variables

-1. two assets move in the exact opposite direction

+1. two assets move in the exact same direction and in the same proportion

based on the ranked size of the variables rather than the absolute size. Rank correlations are sometimes preferred because of the way rank correlation handles the effects of outliers

measures added systematic risk as a proportion of the risk of the index. The beta of an asset may be viewed as the percentage return response that an asset will have an average to a 1 %age point movement in the related risk factor, such as overall market

can be used as a general term to describe possible relationships between the returns of an asset from different time periods.

refers to the correlation between return in time period t and the return in the immediately previous time period t-1