Covariance

How much two investments' returns move together, in the units of the returns themselves.

Correlation is covariance divided by both volatilities, which puts it on a −1 to +1 scale; covariance keeps the scale, so two volatile assets have a larger covariance than two calm ones that move just as faithfully together.

Formula

Cov(A, B) = Σ(a − ā)(b − b̄) ÷ (n − 1)

In Kereon

Charts · Correlation. The sample covariance of the window's returns, annualized by the number of observations a year the window actually holds — a coin's 365, a fund's 252.

Also called: covariance.

Related terms

The whole glossary · Investing tools