Q1) What Is Mean, Covariance, Variance and Correlation Coefficient?
Q1) What Is Mean, Covariance, Variance and Correlation Coefficient?
Q1) What Is Mean, Covariance, Variance and Correlation Coefficient?
Mean
The mean is the average of the numbers: a calculated "central" value of a set of
numbers.
To calculate: Just add up all the numbers, then divide by how many numbers there
are.
Covariance
In probability theory and statistics, covariance is a measure of how much
two random variables change together. If the greater values of one variable mainly
correspond with the greater values of the other variable, and the same holds for the
lesser values, i.e., the variables tend to show similar behavior, the covariance is
positive. For example, as a balloon is blown up it gets larger in all dimensions. In
the opposite case, when the greater values of one variable mainly correspond to the
lesser values of the other, i.e., the variables tend to show opposite behavior, the
covariance is negative.
Variance
In probability theory and statistics, variance measures how far a set of numbers are
spread out. A variance of zero indicates that all the values are identical. Variance is
always non-negative: a small variance indicates that the data points tend to be very
close to the mean (expected value) and hence to each other, while a high variance
indicates that the data points are very spread out around the mean and from each
other.
Correlation coefficient
The correlation coefficient is a measure that determines the degree to which two
variables' movements are associated. The range of values for the correlation
coefficient is -1.0 to 1.0. If a calculated correlation is greater than 1.0 or less than
-1.0, a mistake has been made. A correlation of -1.0 indicates a perfect negative
correlation, while a correlation of 1.0 indicates a perfect positive correlation.
Security
Assets with some financial value are called securities.
Characteristics of Securities
Classification of Securities
Debt Securities: Tradable assets which have clearly defined terms and conditions are called
debt securities. Financial instruments sold and purchased between parties with clearly mentioned
interest rate, principal amount, maturity date as well as rate of returns are called debt securities.
Derivatives: Derivatives are financial instruments with specific conditions under which payments
need to be made between two parties.
Portfolio Theory
Portfolio theory was proposed by Harry M. Markowitz of University of Chicago. According to Markowitzs
portfolio theory, portfolio managers should carefully select and combine financial products on behalf of
their clients for guaranteed maximum returns with minimum risks.
Portfolio theory helps portfolio managers to calculate the amount of return as well as risk for any
investment portfolio.