--- title: "Correlation, R squared and diversification | RupeeCase" description: "Correlation and R squared in the Market link card, and the Diversification card's pairs with the benchmark and your Compare picks, as the app works them out." source_url: "https://www.rupeecase.com/learn/terminal/correlation-and-diversification" --- ## Watch: Correlation In Advanced, Market link sets the strategy against its benchmark.Correlation: how closely did two lines move together? 5 chapters, 0:56, with voice and music 1. [Chapter 1Where it is0:09](/instiv2/media/tut4/correlation-and-diversification-where-phone-dark-v4-va2.mp4) 2. [Chapter 2What it means0:18](/instiv2/media/tut4/correlation-and-diversification-meaning-phone-dark-v4-va2.mp4) 3. [Chapter 3Worked example0:06](/instiv2/media/tut4/correlation-and-diversification-example-phone-dark-v4-va2.mp4) 4. [Chapter 4How to read it0:13](/instiv2/media/tut4/correlation-and-diversification-reading-phone-dark-v4-va2.mp4) 5. [Chapter 5Watch out0:10](/instiv2/media/tut4/correlation-and-diversification-watch-phone-dark-v4-va2.mp4) Screens from the RupeeCase app on sample data. Strategy figures are model, back tested, as of the date on screen. Formula and example numbers are illustrative. Mark as watched 4In this screen ## Every button the video points at. A still from each chapter with its buttons and fields numbered. Pick a number to zoom in on it; hover the still for a close up; Esc shows the whole screen again. Sample data, no order is placed. **1**Where it is**2**What it means**4**How to read it ### Chapter 1: Where it is 1 Show the whole screen 1 Show the whole screen 1. 1**Market link**In Advanced, Market link sets the strategy against its benchmark. Shown in the video, not on this still ### Chapter 2: What it means 12 Show the whole screen 12 Show the whole screen 1. 1**-1 to 1**Correlation: how closely the weekly returns moved together. Shown in the video, not on this still 2. 2**Correlation squared**R squared is correlation squared. Shown in the video, not on this still ### Chapter 4: How to read it 1 Show the whole screen 1 Show the whole screen 1. 1**Your Compare picks**Diversification pairs the strategy with its benchmark and your picks. Shown in the video, not on this still ## Where it is ScreenRisk tab, Market link and DiversificationAdvanced The Risk tab, in Advanced: Market link (Correlation and R squared against the primary benchmark) and Diversification (this strategy, its benchmark and each Compare pick; a track on a phone, a matrix on a wider screen). Index in this video: [Allcap](/strategies/allcap) (strategy page). ## What it means Correlation runs from -1 to 1. Near 1 the weekly returns rose and fell together, near 0 there was little link, and below 0 they tended to move opposite ways. R squared is correlation squared: the share of the strategy's weekly swings that line up with the benchmark's. The Diversification card works each pair out on the weeks both lines have and needs 26 common weeks; it calls a link weak under 0.3, moderate to 0.8 and strong from 0.8, either sign. ## The formula Pearson correlation of weekly returns, on the weeks both lines share; R squared is its square. As computed in the RupeeCase app`Correlation = covariance of weekly returns / (sd x sd), common weeks only R squared = correlation x correlation Diversification: each pair needs 26 common weeks, else n/a Strength by size: under 0.3 weak, 0.3 to 0.8 moderate, 0.8 and above strong` ## Worked example Example only * Correlation 0.6 with NIFTY 50 * R squared 0.6 x 0.6 = 0.36 * About a third of the weekly swings line up with the index ## How to read it * High correlation with your other picks: they tended to move together. * A negative correlation is not a loss: the two tended to move opposite ways. * Add an index, fund or strategy with Compare to see it in the card. ## Watch out * Correlation says nothing about size: a line can be highly correlated and still move less. * It describes past weeks; links between markets change over time. * This recording reads month end history, so its pairs are months. ## Transcript Tap Sound on for voice and music. These are the captions of the video, chapter by chapter. 1. 0:00**Where it is.** In Advanced, Market link sets the strategy against its benchmark. 2. 0:09**What it means.** Correlation: how closely the weekly returns moved together. 3. 0:27**Worked example.** Worked example, example only: Correlation 0.6 with NIFTY 50. R squared 0.6 x 0.6 = 0.36. About a third of the weekly swings line up with the index. 4. 0:33**How to read it.** Diversification pairs the strategy with its benchmark and your picks. 5. 0:46**Watch out.** Watch out: Correlation says nothing about size: a line can be highly correlated and still move less. It describes past weeks; links between markets change over time. This recording reads month end history, so its pairs are months. ## Terms in this tutorial * [correlation](/learn/glossary#correlation)Statistical measure of how two assets move together. * [R squared](/learn/glossary#r-squared)The share of a strategy's week to week moves that the benchmark explains, from 0 to 1. * [diversification](/learn/glossary#diversification)Spreading capital across assets that do not move together. * [beta](/learn/glossary#beta)Sensitivity of a portfolio to the market. ## Learn it in depth * [Module 4.1: Modern Portfolio Theory, What Actually Matters11 min read, free](/learn/path-4/module-4-1-modern-portfolio-theory) * [Module 3.6: Combining Factors10 min read, free](/learn/path-3/module-3-6-combining-factors-multi-factor-construction) * [Module 4.4: Performance Measurement9 min read, free](/learn/path-4/module-4-4-performance-measurement) * [Module 5.1: Statistical Foundations for Quant Investing9 min read, free](/learn/path-5/module-5-1-statistical-foundations) TKeep watching ## Next tutorial. [1:14Next tutorial, Your moneyThe invest sheet: what happens when I press Invest?Invest opens Confirm investment: the amount with its minimum, Practice or Live, your broker and consent. Nothing is placed until Invest now.Watch next](/learn/terminal/invest-sheet) ### Related tutorials * [1:21Make it yours and Advanced, AdvancedAdvanced risk figures: Sortino, Calmar, VaR, beta and more1:21 video, AdvancedWatched](/learn/terminal/advanced-risk-figures) * [1:32Find and compare, BasicCompare with: what do index, fund and strategy lines show?1:32 video, BasicWatched](/learn/terminal/compare-with-indices-and-funds) * [0:59Make it yours and Advanced, AdvancedTreynor, Omega and weeks ahead: three more ways to read risk?0:59 video, AdvancedWatched](/learn/terminal/treynor-omega-weeks-ahead) [All 67 terminal tutorials](/learn/terminal/) Try it in Practice ## See it on your own screen. Practice mode runs the whole terminal without real orders, so you can open any strategy and find every screen from this tutorial for yourself. [Sign up for RupeeCase](https://invest.rupeecase.com/signup)[Glossary](/learn/glossary) Explore next ## Keep learning the terminal. * [TutorialFilters, sort and shortlist: how do I narrow the list?1:41 video, Basic](/learn/terminal/filters-sort-and-table) * [TutorialCompare strategies: how do I set up to four side by side?1:28 video, Basic](/learn/terminal/compare-strategies) * [TutorialThe Compare card: return or growth per year?1:09 video, Basic](/learn/terminal/compare-card) * [TutorialChart metrics: Value, Return, Drawdown and the log scale1:24 video, Basic](/learn/terminal/chart-metrics-and-log) * [TutorialMarketplace chips: what do New, Partner and the themes mean?1:09 video, Basic](/learn/terminal/marketplace-card-chips) Community ## Join my WhatsApp group. Scan the code, fillFill one short form, and join my WhatsApp group. Slides, sources, factsheets and the rebalance logs live there, and members join a daily Google Meet with me. [Sign up for RupeeCase](https://invest.rupeecase.com/signup) [Join the WhatsApp group](https://forms.gle/C6HMtM1Z2GfeocQV7) [One form, one group](https://forms.gle/C6HMtM1Z2GfeocQV7)Scan with your phone camera Education only, not investment advice. Screens are recordings of the RupeeCase app on sample data. Strategy figures are model, back tested and after estimated charges, as of the date on screen; they are not client returns and not a promise of future returns. Formula and worked example numbers are illustrative. RupeeCase is a technology platform operated by QC Alpha Technologies Pvt Ltd; it is not a mutual fund, a PMS, an AIF or a SEBI registered investment adviser. Trades execute through your own SEBI registered broker and the shares sit in your own demat. Investments in securities markets are subject to market risks.