Correlation Matrix

It examines the association or link between multiple variables.

Author: Kevin Henderson
Kevin Henderson
Kevin Henderson
Private Equity | Corporate Finance

Kevin is currently the Head of Execution and a Vice President at Ion Pacific, a merchant bank and asset manager based Hong Kong that invests in the technology sector globally. Prior to joining Ion Pacific, Kevin was a Vice President at Accordion Partners, a consulting firm that works with management teams at portfolio companies of leading private equity firms.

Previously, he was an Associate in the Power, Energy, and Infrastructure Investment Banking group at Lazard in New York where he completed numerous M&A transactions and advised corporate clients on a range of financial and strategic issues. Kevin began his career in corporate finance roles at Enbridge Inc. in Canada. During his time at Enbridge Kevin worked across the finance function gaining experience in treasury, corporate planning, and investor relations.

Kevin holds an MBA from Harvard Business School, a Bachelor of Commerce Degree from Queen's University and is a CFA Charterholder.

Reviewed By: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Last Updated:November 12, 2023

What is a Correlation Matrix?

A correlation matrix examines the association or link between multiple variables. A correlation refers to a connection between two things. So, the addition of a matrix involves the use of several variables that are in conjunction with one another.

A couple of notes to keep in mind when measuring the correlation between variables:

  1. A value of a positive or negative 1 implies a positive or negative association.
  2. A value of 0 indicated there is no association.

More commonly seen in data sets, regressions, and analyses, a correlation matrix can be used similarly throughout all. Therefore, reading a correlation matrix should not be difficult, and it should summarize any given data set.

Remember, any value of 1 or close to 1 is considered a correlation. While a value of 0 or -1 equals negative or no correlation.

Whether you are looking at a firm’s quarterly transactions or a regression line model, creating a matrix can help outline the overall numerical set and determine variable correlations within a regression.

Key Takeaways

  • A correlation matrix identifies the relationship between two or more variables.
  • There must be two or more variables involved to form a matrix.
  • You can form different matrices on various numerical datasets. 
  • Excel spreadsheets provide the necessary functions to perform a correlation test.

Correlation Matrix Example

To elevate your understanding and practice of the correlation matrix, let's discuss the requirements and variables needed to complete the matrix.

Within a newly created Excel sheet, simply input your data and the necessary number of variables used within the data set. The number of variables can range depending on the data set you are working with.

For simplicity, the example depicted throughout the data set compares student test scores, out of one hundred, to other classes.

Data

Next, you will locate the Data tab at the top of the Excel page and navigate to the Data Analysis. Once you have opened the Data Analysis, select the “Correlation” tool to move forward in the matrix process.

Once selected, highlight the data set. As pictured in the example, the data set is organized in columns, so select the “columns” option within the Input Section as necessary.

Additionally, ensure the Output Section has selected “new worksheet ply” before continuing.

Tabs

Now, you should see the data set rearranged to form a matrix of all variables and their correlating link. As photographed, your new data set should look similar to the one below.

As you may notice, the student test scores are now organized in a correlated matrix. In addition, the graph titles may be reworded for clearer understanding based on your specific data set.

Sheet

If you want to learn more about the different mechanisms in building a matrix and organizing the data sets in color, practice with the Top Tip Bio’s YouTube tutorial.

Additionally, our Excel courses offer the resources to help improve your skills in formatting and utilizing various data functions.

Researched and Authored by Caira Sotingco | LinkedIn

Reviewed and edited by Parul GuptaLinkedIn

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