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Finance Dictionary and Glossary of Investment Terms
Covariance
Definition 1.
A statistical measure of the degree to which random variables move together. A positive covariance implies that one variable is above (below) its mean value when the other variable is above (below) its mean value.
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Definition 2.
In statistics, the correlation between two variables times the standard deviation of each.
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Definition 3.
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 vary inversely.One method of calculating covariance is by looking at return surprises (deviations from expected return) in each scenario. Another method is to multiply correlation between the two variables by the standard deviation of each variable.
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