A standardised measure of linear association between two variables, between minus one and one. It is covariance divided by the product of the two standard deviations.
Where you will meet it
Correlation comes up in 153 learning outcome notes across the FRM syllabus.
A few of them:
Insurance Companies and Pension Plans FRM Part I · Financial markets and products
“Risk modules are combined using correlations, so total capital is below the simple sum.”
The Building Blocks of Risk Management FRM Part I · Foundations of risk management
“EL is roughly additive across positions, while UL is not, because it depends on correlation.”
Multivariate Random Variables FRM Part I · Quantitative analysis
“Correlation is covariance rescaled by the two standard deviations: Corr = Cov(X, Y) ÷ (σX × σY).”
Measures of Financial Risk FRM Part I · Valuation and risk models
“Portfolio volatility is below the weighted average of the volatilities whenever the correlation is below 1, for a fully invested portfolio with positive weights summing to 1 and non-zero volatilities.”
GARP does not endorse, promote, review, or warrant the accuracy of the products or services offered by Charta Learning, nor does it endorse any pass rates claimed by Charta Learning. Further, GARP is not responsible for any fees or costs paid by the user to Charta Learning. FRM® and GARP® are registered trademarks owned by the Global Association of Risk Professionals, Inc. The questions, explanations and study notes are written for this product and are not GARP curriculum material.