Covariance measures the relationship between two funds. It measures the extent of mutual variation between them.
– A positive covariance indicates that the fund’s returns tend to move in the same direction.
– A negative covariance indicates a tendency for the returns to move in opposite directions.
– A relatively small or zero value for the covariance indicates that there is little or no relationship between returns for the two funds.
The covariance between two random variables is equal to the correlation between the two random variables multiplied by the product of their standard deviations.