Question

3. Cortex and Lemski stocks have a covariance of -0.085. The variance of Cortex is 0.316 and the variance of Lemski is 0.059. What is the nature of the relationship between the two stocks based on their correlation?

Answer 1

The covariance of both these stocks is representative that both the stocks are sharing NEGATIVE CORRELATIONS as the covariance of both the stocks are negative and it will mean that when one stock will be moving in One direction, The Other stock will be moving in opposite direction, so there is a negative correlation between existent between these two stocks.

Negative correlation will mean that when the movement of one stock is in one direction and movement of other stock in other direction, so if the one stock is moving positively, the other stock will be moving negatively and hence the negative correlation is reflected between two stocks over here, because covariance is is representative of the correlation between these two stocks.