Portfolio Risk and Return : Covariance and Correlation

CFAI Text, Vol 4, Reading 43 & 44

I have difficulties in undersatanding the concepts of the “covariance” and “correaltion”. A level 3 candidate told me that these concepts are introduced in Level 2 curriculum (quantitative methods).

I wonder why CFAI put these two readings in Level 1.

They put it so that we can compute portfolio rik. :slight_smile:

What do you find difficult about them?

Maybe this article I wrote will be of some help: http://financialexamhelp123.com/covariance-and-correlation/.

S2000magician :

I will study the concepts in your article further. It is said that these concepts are introduced in Level 2 curriculum which also covers regressions. Anyway, thank you very much !

Pretty sure this stuff will show up in level 1. (Not regressions) . Anyone care to correct me

Some CFA charterholders told me that they like to suggest CFAI to put these readings (Reading 43 and 44) in Level 2 curriculum, rather than in Level 1 curriculum.

This is because they do think it’s better for candidates to have clear and complete concepts of covariance and correlation along with regression before the studyIng of these two readings.

Covariance measures the level of variability between 2 data sets. It may range from +infinity to -infinity . The figure may be very big on either side . If they change in the same direction , it is called +ve covariance and if they move in the opposite direction , it is called -ve covariance.

Whereas corelation is the standardised form of covariance . it ranges from -1 to +1. So it can be used easily in Financial applications.