UNRAVELING COVARIANCE: UNDERSTANDING THE WORLD OF FINANCIAL RELATIONSHIPS

Covariance is a statistical measure that shows how two variables are related to each other.

In finance, covariance is used to understand the relationship between different assets in a portfolio.

Positive covariance means that two assets move in the same direction, while negative covariance means they move in opposite directions.

Covariance can be used to diversify a portfolio by selecting assets that have low or negative covariance with each other.

There are different types of covariance, including sample covariance, population covariance, and rolling covariance.

Rolling covariance is used to analyze the relationship between assets over a specific time period.

Understanding covariance is important for portfolio managers to make informed investment decisions and manage risk effectively.