Portfolio Risk and Return : Covariance and Correlation

[Asuka]

CFAI Text, Vol 4, Reading 43 & 44
I have difficulties in undersatanding the concepts of the “covariance” and “correaltion”. A level 3 candidate told me that these concepts are introduced in Level 2 curriculum (quantitative methods).
I wonder why CFAI put these two readings in Level 1.

 

[adekunle]

They put it so that we can compute portfolio rik.

 

[DTFerguson]

What do you find difficult about them?

 

[S2000magician]

Maybe this article I wrote will be of some help: http://financialexamhelp123.com/covariance-and-correlation/.

 

[Asuka]

S2000magician wrote:
Maybe this article I wrote will be of some help: http://financialexamhelp123.com/covariance-and-correlation/.

S2000magician :
I will study the concepts in your article further. It is said that these concepts are introduced in Level 2 curriculum which also covers regressions. Anyway, thank you very much !

 

[EPhilly]

Pretty sure this stuff will show up in level 1. (Not regressions) . Anyone care to correct me

 

[Asuka]

Some CFA charterholders told me that they like to suggest CFAI to put these readings (Reading 43 and 44) in Level 2 curriculum, rather than in Level 1 curriculum.
This is because they do think it’s better for candidates to have clear and complete concepts of covariance and correlation along with regression before the studyIng of these two readings.

 

[edupristine]

Covariance measures the level of variability between 2 data sets. It may range from +infinity to -infinity . The figure may be very big on either side . If they change in the same direction , it is called +ve covariance and if they move in the opposite direction , it is called -ve covariance.
Whereas corelation is the standardised form of covariance . it ranges from -1 to +1. So it can be used easily in Financial applications.