Hello, do we have to know the covariance formula for the exam? (the really long one, specifically 8-15 formula) also, could someone please explain the concept of covariance? thx a lot
rockstar Wrote: ------------------------------------------------------- > Hello, > > do we have to know the covariance formula for the > exam? (the really long one, specifically 8-15 > formula) > > also, could someone please explain the concept of > covariance? > > thx a lot yes, it is fair game one form of the equation = COVAR = correl b/t asset A and B DIVIDED by st dev of A times st dev of asset B looks like BETA formula bit also, COVAR can be gleaned off those annoying tables/matrices. i hate those use covar to determine the relationship b/t t aaset returns. it will tell you direction of relationship, but you need CORREL to know the STRENGTH…
your brain only has so much space, so its not necessarily in your interest to try to remember variables and formulas as they are written in a textbook. try to internalize it for instance… as daj says, cov is the direction of the relationship- do these two assets move togetehr or not? as per the formula- try to think of covariance as the sum of the products of the error terms. this makes intuitive sense as below error term a = (observation for - expectation of a) error term b = (observation for - expectation of b) since you match up the observations on time periods, if at some time A was above expectation and B was below expectation, multiplying them together will give you a negative number. adding this negative number to all of the other iterations will lower the sum of the products of the error terms- lower covariance *****Daj- don’t you mean corr x stdev a x std dev? The formula for correlation is the covariance a,b / stdev a x stdev b