= standard deviation of average return over n years

= standard deviation of rate of return in 1 year

n = time in years

Another important measure used in portfolio analysis is correlation. Correlation describes how well two assets move relative to one another. The correlation coefficient describes the pattern of two asset's returns relative to one another. A correlation coefficient can range between -1.0 and + 1.0. Assets are said to be perfectly positively correlated if the correlation coefficient equals 1.0 and the assets are said to be perfectly negatively correlated, if the correlation coefficient is -1.0. A correlation coefficient of 0.0 indicates that the returns of two assets are uncorrelated. In portfolio management, the intent is to locate and combine assets with low or negative correlations. For diversification purposes, a perfectly negative correlation is most attractive, since this indicates that the securities vary in opposite directions and fluctuations will tend to cancel one other. Correlation of -1.0 (perfect negative correlation) allows the risk of the portfolio as measured by the standard deviation to equal zero.