What does perfectly negative correlation between two stocks indicate?

Perfectly negative correlation between two stocks indicates that their returns move opposite each other. This means that if one stock experiences an increase in value, the other stock will decrease by an equivalent amount, and vice versa. Such a relationship is represented by a correlation coefficient of -1. This negative correlation can be beneficial for investors as it allows for diversification; when one stock is performing poorly, the other may offset those losses, helping to stabilize the overall portfolio returns.

In contrast, a perfectly positive correlation would mean that the returns move together, while independence would indicate that changes in one stock do not affect the other. Unpredictability suggests that returns cannot be anticipated based on the movements of the other stock. Therefore, the understanding of a perfectly negative correlation is key for strategies aimed at risk management and portfolio optimization.