Covariance

usgb/ˌkoʊˈveɪəns/
noun

Covariance is a measure that indicates the extent to which two random variables change together. A positive covariance means that the variables tend to increase or decrease together, whereas a negative covariance means that when one variable increases, the other tends to decrease.

The covariance between the two stocks shows they generally move in opposite directions.
Visual representation of "covariance" - Covariance is a measure that indicates the extent to which two random variables change together. A positive covariance means that the variables tend to increase or decrease together, whereas a negative covariance means that when one variable increases, the other tends to decrease.

Often appears as...

  • positive covariance
  • negative covariance

Usage tips

Neutral

General

Definition 1 of 2
Visual representation of "covariance"
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Understanding Relationships

Covariance helps you see how two variables relate.

Illustration for Understanding Relationships
In finance, it is used to assess asset risk.
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Positive vs. Negative

Knowing whether covariance is positive or negative impacts analysis.

Illustration for Positive vs. Negative
This is critical for investment strategies.
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Strong vs. Weak

A large magnitude of covariance indicates a strong relationship.

Illustration for Strong vs. Weak
Having some correlation knowledge is beneficial.
Visual representation of the word "Covariance"

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