Understanding Correlation And Covariance. And What It Means For Your Portfolio. Jan. 27, 2012 11:53 AM ET. ... The asset being measured is either greater than, less than, or equal to 1.

Uses of Covariance . Covariance can tell how the stocks move together, but to determine the strength of the relationship, look at their correlation.The correlation should, therefore, be used in ...

Correlation is bound by 1 and -1, ... correlation does not equal causation. ... etc. Correlation is calculated as the covariance of two series divided by the product of their standard deviation.

The correlation calculation simply takes the covariance and divides it by the product of the standard deviation of the two variables. This will bind the correlation between a value of -1 and +1.

For instance, suppose that in a population of aspiring Hollywood actors there is no correlation between acting ability and physical attractiveness.

More subtle, but significant changes of correlation can also be observed between single stocks and/or between sectors in the stock market. For example, a downward move of the S&P 500 leads to an ...