Understanding Correlation Coefficients

In finance, understanding the relationship between two assets is crucial for portfolio management. A key metric for assessing this relationship is the correlation coefficient, which quantifies how the returns of two assets move in relation to each other.

The correlation coefficient, denoted as $\rho(X, Y)$, ranges from -1 to +1. A correlation coefficient of +1 indicates that the assets move perfectly in the same direction, while -1 indicates they move perfectly in opposite directions. A correlation of 0 implies no relationship between the returns of the assets.

If the correlation between two assets is high and positive, it suggests that as the return on one asset increases, the return on the other asset tends to also increase. Conversely, a high negative correlation means that as one asset's return increases, the other tends to decrease.

Given the information above, what does a correlation coefficient of -0.8 indicate about two assets?