How to Calculate Correlation Coefficients $-$ a step$-$by$-$step example

Click to start. Then click on each step below to calculate the correlation coefficient

The following columns show the return on IBM and GE in a recent $12-$month period:

Step $1$

Step $2$

Step $3$

Step $4$

Step $5$

Step $6$

Step $7$

Calculate the average monthly return of each stock

For each stock calculate the deviations from the average return

Square these deviations

Calculate the average squared deviation $($the variance$).$

Take the square root of the variance. This is the standard deviation of returns $().$

Multiply together the deviations from the average return in columns $3$ and $4.$

Average these products. This is the covariance $($cov$)$ between IBM and GE returns $({}_{\text{I}\text{B}\text{M}\text{.}GE})$

Divide the covariance by each of the two standard deviations. This is the correlation between IBM and GM returns.

The formula for the correlation coefficient between IBM and GE is $\frac{{}_{\text{I}\text{B}\text{M}\text{.}GE}}{{}_{\text{I}\text{B}\text{M}}{}_{GE}}$ FIND ME A CORRELATION COEFFICIENT