In: Statistics and Probability
7) COVARIANCE AND CORRELATION COEFFICIENT. What is covariance? How is covariance and correlation coefficients linked? How does the concept of covariance link to the Timura depiction of an efficient frontier oriented “silver bullet” In addition, draw a graphic that explains your thinking using real estate, international, private equity, venture capital, etc.
Covariance:
It is an analysis of how much 2 random variables vary together. It is very much similar to variance. But, variance normally determines that how a single variable varies and on the other hand, covariance determines how 2 variables vary together.
Formula:
Correlation:
Correlation is an analysis that normally analyses the strength of association between 2 variables and also the direction of the relationship. The strength of relationship normally varies between +1 and -1. If the value is 0, then it means that there doesn't exists any relationship between the variables. If the correlation is close to 1 and is positive it signifies that there is a positive strong relationship between the variables. Here if one variable increases then the other also increases. On the other hand if the value is close to -1, it represents a negative strong relationship between the variables.
Formula:
Relationship between correlation and covariance...
For the second part, the question was not clear to us... Can you please elaborate what is your query or else give us a data set so that we can do the analysis for you...