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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 shows the directional relationship between returns of assets.It helps to choose stocks with minimum variance.Its values lies from positive infinity to negative infinity.

Correlation measures the relationship between the returns of two assets and the degree o relation.It is also used top create a portfolio with minimum or desired variance.
Mathematically it can be defined as the covariance of two assets divided by the product of the standard deviation of 2 assets = ab = Covar(ra* rb)/(a*b)
Correlation lies between -1 and 1.

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