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Portfolio analysis

Correlation according to Cohen (2003) can be defined as the description of the degree in which two variables are related to each other. For example how is coffee business growth related to the weather patterns? Correlation can either be positive or negative meaning a single variable can affect the other positively or negatively. Covariance on the other hand can be defined as the manner two variables change at the same time. Covariance can be described as how two risky assets go hand-in-hand or in relation to one another (see C. Patrick Doncaster, 2007). If the covariance is positive this implies that the assets returns are simultaneous and if negative, this will imply the returns on the assets are inverse.Correlation and covariance both describe the relationships of two variables and in the way they move whether positively that is together or negatively that is inversely. Looking at the above definitions of covariance and correlation we can clearly see the relationship between the two in the context that correlation will determine the extent to which two variables are connected to each other while covariance will look at the same two variables and asses how they move together. Portfolio diversity is best achieved if the covariance is not in the same direction meaning the assets in the portfolio do not have perfect correlation (see Alexander, 2009). If the two asset variables do not have a direct relationship in terms of their asset returns this will mean that they do not move in the same direction ...Show more

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Correlation according to Cohen can be defined as the description of the degree in which two variables are related to each other.For example how is coffee business growth related to the weather patterns?Correlation can either be positive or negative meaning a single variable can affect the other positively or negatively…
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Portfolio analysis essay example
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