16.5. Covariance vs Correlation

Try these first

1. 1.

   What does a positive covariance indicate?

   Hint

   Think about how two variables can move together.

2. 2.

   Is correlation a dimensionless value?

   Hint

   Consider the range of correlation values.

3. 3.

   What is the range of values of correlation?

   • -1 to 1
   • -∞ to ∞
   • 0 to 1

   Hint

   Think about how correlation is measured and the meaning of its extremes.

4. 4.

   True or False: Covariance can be a negative number.

   • True
   • False

   Hint

   Recall how covariance describes variable interactions.

5. 5.

   A dataset comprises the following observations for two variables: A = {10, 20, 30, 40} and B = {5, 10, 15, 20}. Calculate the covariance and the correlation between A and B.

   Hint

   Apply the covariance and correlation formulas carefully, ensuring to calculate means first.

6. 6.

   How might covariance apply differently when analyzing stock returns of two companies versus analyzing temperature variation and ice cream sales?

   Hint

   Reflect on real-life implications of variable relationships.