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Covariance Understanding The Relationship Between Variables

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4 views

Covariance Understanding The Relationship Between Variables

Uploaded by

shamika prabhu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Covariance:

Understanding the
Relationship between
Variables

Covariance is a statistical measure that quantifies the


strength and direction of the linear relationship between two
random variables. It measures how much two variables
change together.
Introduction to
Covariance

1 Key Concept 2 Quantitative Measure 3 Foundation


Covariance helps understand It provides a numerical value for
how changes in one variable to indicate the relationship's Correlation
affect changes in another. direction and strength. Covariance forms the basis
for calculating the correlation
coefficient, a standardized
measure of the relationship.
The Concept of
Covariance

Positive Covariance Negative Covariance Zero Covariance


Variables move in the same Variables move in opposite No linear relationship exists
direction. When one variable directions. When one variable between the variables. Changes
increases, the other tends to increases, the other tends to in one variable don't predict
increase as well. decrease. changes in the other.
Derivation of
Covariance Formula
Covariance (X, = E[(X - E[X])(Y - E[Y])]
Y)

Where:

E[X] is the expected value of variable

X E[Y] is the expected value of

variable Y
Properties of
Covariance

Symmetry Linearity
Cov(X, Y) = Cov(Y, Cov(aX + b, Y) = a Cov(X,
X) Y)

Non-
negativity
Var(X) = Cov(X, X)
Positive and
Negative Covariance

Positive Covariance Negative Covariance


Indicates a positive linear relationship between Indicates a negative linear relationship between
variables. As one increases, the other tends to variables. As one increases, the other tends to
increase. decrease.
Application of
Covariance
1 Risk Management 2 Machine Learning
Feature engineering to
Assessing the
identify relevant
relationship between
variables in predictive
different assets to
models.
manage portfolio risk.

3 Statistical Analysis
Understanding relationships between variables to
draw conclusions from data.
Example 1: Covariance
in Stock Market
Step 1
1
Calculate the daily returns for each
stock.

Step 2
2
Calculate the covariance between the daily returns of
the two stocks.

Step 3
3
A positive covariance indicates that the stocks tend to
move together, while a negative covariance suggests
they move in opposite directions.
Example 2: Covariance in
Educational Attainment

Study Time Test Score


The number of hours The score obtained on the
spent studying for a test. test.

A positive covariance would suggest that students who study


more tend to score higher on tests.
Conclusio
n
Covariance is a valuable tool for understanding relationships
between variables. It helps in risk management, machine learning,
and various statistical analyses. Understanding the concept and
applying it effectively can provide valuable insights into data and
support informed decision- making.
THANK
YOU

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