What is COVARIANCE?

A statistical measure of the relationship between two variables (e.g., financial ASSET prices), often used to determine the magnitude of CORRELATION. The covariance between two assets can be computed via: where xAj is an observation of asset A, xA is the MEAN of asset A, x Bj is an observation of asset B, xB is the mean of asset B, and n is the number of observations. See also CORRELATION COEFFICIENT.

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