Financial analysts and investors observe the movement of stocks, and try to strike a correlation with one another as well as in the market. Also, if the interest rate of a bank increases from 3% to 3.5%, the amount of interest will increase, and similarly, if the interest rate is lowered, the amount of interest will be reduced too. As more money in the savings account is added irrespective of the source, the account holder will receive more interest on the underlying amount. In the finance industry, the savings account and the interest rate thereon can be a fine example of positive correlation. For example, an organization with better financial performance boosts investors confidence to make investments in their stocks, thereby increasing its stock price. There can be cases when positive changes in a sector can be because of positive psychological responses. The hike or rise experienced in one sector would have an effect on complementary sectors. The rise in demand of vehicles would lead to an increase in related demand of their services. For example, complementary demand of product. Correlation is a kind of dependency where a change in one variable represents a change in the other variable too. Therefore, there can be movement among specific variables, the cause of such movements taking place may be hard to find. It is not necessary for causation to take place if correlation exists. So, if there is an increase in one variable, there would be an increase in another variable too. Instead, it just signifies a direct relationship between two variables. A positive correlation is not an indicator of advantage or growth. As airplanes work on fuel, such raise in cost is ultimately allocated to be borne by the consumers, hence creating a positive correlation between airline ticket price and fuel prices. With the increase in prices of fuel, airline tickets get expensive as well. Also, profits and losses in specific markets may cause similar trends in the related markets. The price of a product with an increase in demand, provided the supply doesnt change. The product demand and the related price can represent a positive correlation. Back to: RESEARCH, ANALYSIS, & DECISION SCIENCE How is Positive Correlation Used?Ī perfectly positive correlation refers to the situation that states that all variables in picture move together in the same direction and with the same percentage. Beta measures the correlation of the price of a stock with the bigger market, by using the S&P 500 index as a standard.There can be a positive correlation between stocks, or with the whole market.When one variable increases, there will be an increase in another variable, and a fall in one variable would cause a fall in another variable.Positive correlation refers to a link between two variables moving in the similar direction.If there lies a correlation among variables, it doesnt mean causation. In statistical terms, a perfectly positive correlation signifies the correlation coefficient value of +1.0, no correlation signifies the CV of zero, and negative or a perfect inverse correlation signifies -1.0. When the increase in one variable causes an increase in the second variable, and decrease in one variable causes a decrease in the other, it is a sign of positive correlation. Positive correlation refers to the relationship formed between two variables where both of them move in a similar direction. Update Table of Contents What is Positive Correlation? How is Positive Correlation Used? Positive correlation in Finance Beta and Correlation The Difference between positive correlation and inverse correlation Academic Research on Positive Correlation What is Positive Correlation?
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