Groundlearn / Glossary / Correlation
Correlation
Also called correlation coefficient. A CFA and FRM term, defined in plain English with the distinction examiners test.
What it means
Covariance divided by the product of the two standard deviations, giving a unit-free number between −1 and +1.
The exam angle
Measures linear association only. A perfect non-linear relationship can show near-zero correlation, and correlation tends to rise sharply in a crisis — exactly when diversification was being relied on.
Where it appears in the syllabus
- Quantitative MethodsCFA Level I · exam weight 11–14% · Returns and benchmarks, time value, distributions, portfolio maths, regression.
- Portfolio ConstructionCFA Level I · exam weight 8–12% · Risk and return, the CAPM, IPS construction, behavioural biases.
- Quantitative AnalysisFRM Part I · exam weight 20% · Probability, hypothesis testing, regression, time series, volatility, simulation.
- Market Risk Measurement & ManagementFRM Part II · exam weight 20% · VaR and ES estimation, backtesting, EVT, GARCH, copulas, FRTB.
Related terms
- Standard deviationThe square root of variance, in the same units as the data.
- CovarianceA measure of how two variables move together.
- KurtosisThe weight of a distribution’s tails.
- Monte Carlo simulationEstimating a distribution of outcomes by repeatedly drawing random inputs from assumed distributions and recomputing…
- AlphaReturn in excess of what the asset’s risk exposures would predict.
- Arithmetic meanThe sum of the observations divided by their number.
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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