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describe what covariance and correlation are and how they differ and are used by analysts with...

describe what covariance and correlation are and how they differ and are used by analysts with respect to stock valuation.

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Answer #1

Covariance and correlation both show how two variables are related and whether they move in same direction or opposite direction.
Differences: Covariance is measure of movement between two variables whereas correlation is statistical measure of movement between . covariance lies between - infinity to + infinity whereas correlation lies between -1 to + 1. Correlation uses scaling factor whereas covarinace doesnot.

They can be used by analysts for calculating beta of portfolio and market, variance of returns, standard deviation and minimum variance portfolio.

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