CFP Formula Series: Covariance

Posted by Jerry Mee, CFP®

Jun 3, 2020

Why is covariance important?

Covariance is a statistical measure that offers advisors information on the general direction that assets tend to move. As a stand-alone data point, its practical applications are somewhat limited to basic asset inclusion decisions. Covariance also serves as a variable in the equations to solve for Beta and the standard deviation of a two-asset portfolio. In both of these equations, the information provided to an advisor on volatility and/or the variability of two-assets can more effectively guide portfolio design.

 

 

Why is the CFP® provided formula sheet important?

The CFP® provided formula sheet is one of only three resources you can access during the Exam. The others are the tested tax tables and your financial calculator. A good understanding of the formula sheet will allow you to quickly identify situations where a listed formula can be helpful, put that formula to use and ultimately answer the question correctly in as little time as possible. Our goal with our CFP® formula videos is to decode each of the formulas on the provided formula sheet.

Find more helpful videos on The Boston Institute of Finance's YouTube page.

 

Topics: CFP Formulas Video Series