Portfolio Analysis using Covariance and Correlation Coefficient. Essentials of Investments. CFA exam
In this video, I discuss portfolio analysis using covariance and correlation coefficient. Portfolio analysis is an examination of the components included in a mix of products with the purpose of making decisions that are expected to improve overall return. Portfolio analysis is the process of studying an investment portfolio to determine its appropriateness for a given investor's needs.
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Covariance in Portfolio Management
Covariance applied to a portfolio can help determine what assets to include in the portfolio. It measures whether stocks move in the same direction (a positive covariance) or in opposite directions (a negative covariance). When constructing a portfolio, a portfolio manager will select stocks that work well together, which usually means these stocks' returns would not move in the same direction.
In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. In the broadest sense correlation is any statistical association, though it commonly refers to the degree to which a pair of variables are linearly related. Familiar examples of dependent phenomena include the correlation between the physical statures of parents and their offspring, and the correlation between the price of a good and the quantity the consumers are willing to purchase, as it is depicted in the so-called demand curve.
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