Level 1 Chartered Financial Analyst (CFA ®): Correlation, covariance and probability topics

Session 2, Reading 9 (Part 2): This video reviews portfolio variance and covariance, where covariance is the expected cross-product. We look at correlation, which is given by the covariance divided by the product of standard deviations, and therefore standardizes the covariance into a unitless, intuitive measure of linear relationship. Because covariance and correlation are linear, it is important to realize that although independence implies zero correlation, the converse is not true; i.e., zero correlation does not imply independence. Special topics include Bayes Formula (aka, Bayes Theorem), multiplication rule, multinomial formula for labeling, and finally combinations versus permutations.
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[@zerocapacitance1]

Excellent, just subscribed

[@michaelmeechan8328]

How do you get the standard deviation that you show?

[@chrislawless1983]

Maybe I'm wrong, but for the correlation example (16 minutes in) I have the answer as 0.931. Unless it's a rounding issue?

[@bionicturtle]

Hi Chris, Yes that appears to be rounding: if we retain the rounding (as displayed), the correlation appears to be = 0.0031/(0.084*0.04) = 0.92262 which rounds to 0.92 but does roundup to 0.93. The exact solution is given by 0.003062
/(0.08378 * 0.03966) = 0.92144 which rounds to the displayed 0.92. Thank you for checking!