If two investments tend to move up and down in value at the same rate over time, these investments are said to have which type of correlation?

• A. Negative.
• B. Zero.
• C. Positive.
• D. Phased.

Answer: (C)

When two investments move up and down in value at the same rate, their returns tend to rise and fall together, which is what positive correlation describes. Correlation measures how returns move in relation to each other. A strong positive correlation means that as one investment’s return goes above its average, the other’s tends to go above its average as well, and as one falls, the other tends to fall too, with similar magnitudes. This in-sync movement is what you’d expect with a positive correlation.

If they moved unpredictably with no consistent relationship, the correlation would be zero. If they tended to move in opposite directions, that would be negative correlation. The option described as “phased” isn’t a standard way to describe correlation, so it doesn’t fit the concept of how the assets’ values move together.