16.1. Covariance

Try these first

1. 1.

   What does a positive covariance indicate?

   Hint

   Think about how two related variables might behave.

2. 2.

   What is the formula for covariance?

   Hint

   Recall the relationship with mean values.

3. 3.

   What is the range of covariance values?

   • 0 to 1
   • -∞ to ∞
   • -1 to 1

   Hint

   Consider if a value could fall below zero.

4. 4.

   True or false: Correlation measures the strength and direction of a linear relationship.

   • True
   • False

   Hint

   Remember the role of correlation in analysis.

5. 5.

   Given the datasets A = {3, 6, 9} and B = {3, 3, 6}, calculate the covariance and correlation, explaining the contextual relationship evident in the value.

   Hint

   Work step by step from finding means to calculating covariance.

6. 6.

   Critically evaluate the usage of covariance in evaluating risk in financial portfolios. How does it aid in investment decisions?

   Hint

   Use real financial examples to illustrate your interpretation.