Plain-English definitions, reviewed by an independent investor
Covariance
Covariance shows whether two assets tend to move together and by how much.
Covariance shows whether two assets tend to move together and by how much.
Covariance = Average of (X−MeanX)(Y−MeanY)
Why it matters
It feeds correlation and portfolio risk maths directly.
Common confusion
Its scale depends on the assets, so correlation (normalised) is easier to read.
Frequently Asked Questions
Covariance vs correlation?
Correlation is covariance divided by the two SDs, from −1 to +1.
Negative covariance?
Means the assets tend to move opposite, useful for hedging.