What does covariance tell us about the relationship between two variables?

Covariance and Correlation are very helpful in understanding the relationship between two continuous variables. Covariance tells whether both variables vary in the same direction (positive covariance) or in the opposite direction (negative covariance).

Is a high covariance good or bad?

What does high covariance between two variables indicate? Absolutely nothing, or rather it suggests a positive relationship, but says nothing about the strength of the relationship. If the product of the standard deviations of the two variables is large compared to the covariance the relationship is weak.

What does it mean for two variables to Covary?

When two variables are related, changes in one variable are met with similar changes in the other variable. They covary because as one variables deviates from the mean in one direction, the other variable deviates from the mean in the same direction.

What does a high covariance mean?

Covariance in Excel: Overview Covariance gives you a positive number if the variables are positively related. You’ll get a negative number if they are negatively related. A high covariance basically indicates there is a strong relationship between the variables. A low value means there is a weak relationship.

What is the highest covariance?

With covariance, there is no minimum or maximum value, so the values are more difficult to interpret. For example, a covariance of 50 may show a strong or weak relationship; this depends on the units in which covariance is measured.

Why covariance is important?

Covariance can be used to maximize diversification in a portfolio of assets. By adding assets with a negative covariance to a portfolio, the overall risk is quickly reduced. Covariance provides a statistical measurement of the risk for a mix of assets.

What is a high covariance?

A high covariance basically indicates there is a strong relationship between the variables. A low value means there is a weak relationship.

What is meant by high variance?

A large variance indicates that numbers in the set are far from the mean and far from each other. A small variance, on the other hand, indicates the opposite. A variance value of zero, though, indicates that all values within a set of numbers are identical. Every variance that isn’t zero is a positive number.

How high is covariance?