Definition
Covariance indicates the directional relationship between two assets' returns. Positive covariance means they tend to move in the same direction; negative means opposite directions. Unlike correlation, covariance isn't standardized, making comparisons difficult. It's used in portfolio variance calculations.
Formula
Cov(X,Y) = Σ[(Xi - X̄)(Yi - Ȳ)] / (n-1)
Example
Stocks A and B have positive covariance of 0.002, meaning when A rises, B tends to rise too.
FAQ
What is Covariance?
A measure of how two assets move together directionally.
How do you calculate Covariance?
A common formula for Covariance is: Cov(X,Y) = Σ[(Xi - X̄)(Yi - Ȳ)] / (n-1)
Why is Covariance important?
Covariance helps investors evaluate portfolio management and make more informed decisions.