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# Covariance

A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns move together. A negative covariance means returns move inversely.

One method of calculating covariance is by looking at return surprises (deviations from expected return) in each scenario. Another method is to multiply the correlation between the two variables by the standard deviation of each variable.

Possessing financial assets that provide returns and have a high covariance with each other will not provide very much diversification.

For example, if stock A's return is high whenever stock B's return is high and the same can be said for low returns, then these stocks are said to have a positive covariance. If an investor wants a portfolio whose assets have diversified earnings, he or she should pick financial assets that have low covariance to each other.

Investment dictionary. . 2012.

### Look at other dictionaries:

• covariance — [ kovarjɑ̃s ] n. f. • 1921; de co et variance ♦ Math. Covariance de deux variables aléatoires : moyenne des produits de deux variables centrées sur leurs espérances mathématiques et servant à définir leur coefficient de corrélation. ● covariance… …   Encyclopédie Universelle

• covariance — n. a statistical measure of the relationship of two variables, formed by multiplying the difference of each variable from its mean, both variables being measured at the same time, and averaging all such products. [WordNet 1.5 +PJC] …   The Collaborative International Dictionary of English

• covariance — 1878, from covariant (1853), from CO (Cf. co ) + VARIANT (Cf. variant) …   Etymology dictionary

• covariance — [kō′ver΄ē əns, kō′ver′ē əns] n. Statistics a measure of the relationship between two variables whose values are observed at the same time; specif., the average value of the product of the two variables diminished by the product of their average… …   English World dictionary

• Covariance — This article is about the measure of linear relation between random variables. For other uses, see Covariance (disambiguation). In probability theory and statistics, covariance is a measure of how much two variables change together. Variance is a …   Wikipedia

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• covariance — A measurement of the relationship between two variables. The arithmetic mean of the products of the deviations of corresponding values of two quantitative variables from their respective means. American Banker Glossary A statistical measure of… …   Financial and business terms

• covariance — kovariacija statusas T sritis Standartizacija ir metrologija apibrėžtis Dviejų atsitiktinių kintamųjų dydžių tarpusavio priklausomybės matas, lygus jų verčių sandaugos statistiniam vidurkiui. atitikmenys: angl. covariance vok. Kovarianz, f rus.… …   Penkiakalbis aiškinamasis metrologijos terminų žodynas

• covariance — kovariantiškumas statusas T sritis fizika atitikmenys: angl. covariance vok. Kovarianz, f rus. ковариантность, f pranc. covariance, f …   Fizikos terminų žodynas

• Covariance — A statistical measure of the degree to which random variables move together. The New York Times Financial Glossary * * *    A statistical term for the correlation of two variables multiplied by the individual standard deviation for each of the… …   Financial and business terms