![]() ![]() The benefits of covariance in business or investing include:ĭiversification: You can use covariance to diversify your investment portfolio, which can create better risk management or returns compared to similar investments in scope and risk. Related: How To Calculate Covariance in 6 Steps (With Examples) What are the benefits of covariance? For example, when one stock is underperforming, another successfully decreases your financial losses. You can use covariance to build a balanced risk portfolio in investing. This means that when one falls, the other rises. ![]() Conversely, a negative or inverse covariance shows that the returns of both investments move away from each other. A positive covariance shows that the returns on both investments move in value up or down simultaneously. In a financial context, covariance relates to the returns on two different investments over time when compared to different variables, like stocks or other marketable securities. A high covariance shows a strong relationship between two variables, whereas a low covariance shows a weak relationship. It measures the movement of two variables, though not necessarily the degree to which they move in relation to one another. Covariance is a statistical measurement of how two unrelated or random variables change when compared to each other. ![]()
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