![]() ![]() ![]() Notably, this means that two variables could decrease in the same direction, and the covariance would still return as a positive value. If the value for covariance is positive, then the two variables move in the same direction. If the value for covariance is negative, then, the two variables move in opposite directions. Since they represent both values in terms of dollars, the units for the measurement would be dollars.Ĭovariance compares the two variables in terms of positive and negative. For example, in finance, two data sets could be the cost of one company's stock, while the other could be an unrelated company's stock. You can measure covariance in terms of units related to the two variables in the data sets. It is a measurement of the difference between the two variables, and the two variables used to determine covariance are unrelated. Related: How To Calculate Safety Stock (With Examples) What is covariance?Ĭovariance is a measurement used in statistics to determine if two variables are changing in the same direction. In this article, we discuss what covariance is, how it differs from variance, how to calculate it in six steps, its applications and an example of the calculation. Knowing how to calculate covariance can give you insights into the relationship between two stocks. Covariance is one measurement you can use to help you analyze risk. Determining which stocks to add to your portfolio is an important decision. ![]()
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