Topic 1 (Pt3) - Intro to Financial Markets Flashcards
1
Q
Covariance formula
COV (RaRb)
A
1/T sum of (Rat - meanA) (Rbt - meanB)
Rat = the return for asset A in the time period
2
Q
What does a positive covariance mean?
A
They are moving in the same direction and deviate from their means in similar ways.
Positive covariance = positive correlation
3
Q
Correlation formula
Corr (RaRb)
A
COV(RaRb) / (CovA x CovB)
4
Q
Why is correlation important?
A
The correlation between assets has an important role in reducing risk
