While correlated activity is observed ubiquitously in the brain, its role in neural coding has remained controversial. Recent experimental results have demonstrated that correlated but not single-neuron activity can encode the detailed time course of the instantaneous amplitude (i.e., envelope) of a stimulus. These have furthermore demonstrated that such coding required and was optimal for a nonzero level of neural variability. However, a theoretical understanding of these results is still lacking. Here we provide a comprehensive theoretical framework explaining these experimental findings. Specifically, we use linear response theory to derive an expression relating the correlation coefficient to the instantaneous stimulus amplitude, which takes into account key single-neuron properties such as firing rate and variability as quantified by the coefficient of variation. The theoretical prediction was in excellent agreement with numerical simulations of various integrate-and-fire type neuron models for various parameter values. Further, we demonstrate a form of stochastic resonance as optimal coding of stimulus variance by correlated activity occurs for a nonzero value of noise intensity. Thus, our results provide a theoretical explanation of the phenomenon by which correlated but not single-neuron activity can code for stimulus amplitude and how key single-neuron properties such as firing rate and variability influence such coding. Correlation coding by correlated but not single-neuron activity is thus predicted to be a ubiquitous feature of sensory processing for neurons responding to weak input.