CFP Formula Series: Covariance

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.   Read More