What is variance? How it differs from co-variance? How these are related to correlation?
The variance means the quality of being different divergent from the norm.
It measures how far each number in the set is from the mean (average), and thus from every other number in the set.
Variance is often depicted by this symbol: σ2. It is used by both analysts and traders to determine stock volatility and market security.
The square root of the variance is the standard deviation (SD or σ), which helps determine the consistency of an investment’s returns over a period of time.
Variance is also used in finance to compare the relative performance of each asset in a portfolio to achieve the best asset allocation.
How spread apart the deviation from mean each value of the variable.
If we average out the deviation of all points from the mean, all points will have equal weightage. it means extreme values will be as important as less values lose o mean. In order to improve upon his we firs square he difference and then divide it by the number in case of population and by n-1 for a sample variance.
Correlation measures the degree of the linear relationship between two variables. the value is ranged between -1 to 1.
Covariance is not bound by any range of values and derived from correlation.
Correlation is the standardized measure of covariance. Covariance gives the degree and direction of relation between the variables while correlation gives how they are related. covariance is about above or below mean, positive or negative but correlation gives which direction and how much.