Correlation

[Paul Altman <paulha@xxxxxxxxxxxxx>]

I'd like to assemble a basket of stocks that correlate strongly with 
indexes, say for the last year.  So I figure I'll search for stocks that 
have a high "Pearson product moment correlation coefficient" (phew, copied 
that from Excel, glad I didn't have to say it out loud) with the 
index.  But since I don't truly grasp the details of the formula (after 
staring at it for quite a while), here's my question:

What data do I enter into the formula, which compares two identically-sized 
arrays of values?  I figure I'll have two arrays of data, each 252 days 
long.  But if I take the % return: over what period of time should the % 
return be calculated (daily?, weekly?, monthly?).   And doesn't the % 
return have large distortions, when the values become very small?  After 
all, 0.00001% is mathematically about a zillion times bigger than 
0.0000000000000001%, but in the real world they're both ~ 0.0  .

Is there a "right" way to do a correlation study, that addresses these issues?

Thanks for any comments.

      Paul