Covariance defined In probability theory and statistics, covariance measures the comovement between two variables i.e. the amount by which the two random variables show movement or change together. If the two variables are dependent then the covariance can be measured using the following formula: For two independent variables the joint densities are separated and the

# covariance

## How to Calculate Portfolio Risk and Return

In this article, we will learn how to compute the risk and return of a portfolio of assets. Let’s start with a two asset portfolio. Portfolio Return Let’s say the returns from the two assets in the portfolio are R1 and R2. Also, assume the weights of the two assets in the portfolio are w1

## Correlation and Covariance

Both correlation and covariance are an indicator of the relationship between two variables. They indicate whether the variables are positively or negatively related. The correlation also indicates the degree to which the two variables are related. It’s a translation of covariance into a unit-less measure that we can understand (-1.0 to 1.0). The correlation of

## The Mutual Fund Theorem and Covariance Pricing Theorems

This lecture continues the analysis of the Capital Asset Pricing Model, building up to two key results. One, the Mutual Fund Theorem proved by Tobin, describes the optimal portfolios for agents in the economy. It turns out that every investor should try to maximize the Sharpe ratio of his portfolio, and this is achieved by