From the course: Excel for Investment Professionals

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Finding covariances and correlations

Finding covariances and correlations - Microsoft Excel Tutorial

From the course: Excel for Investment Professionals

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Finding covariances and correlations

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- [Instructor] A key part of building a portfolio is making sure that the assets that you have in that portfolio provide diversification. Diversification helps to reduce the risk in that overall portfolio but how do we know if two assets are complimentary to one another? How do we know if two assets will provide diversification when compared with one another? Well, Excel can help us with this and the calculation of what we call correlation and covariance. Let me show you what I'm talking about. I'm in the 0305 begin Excel file. Now what we've got here are return data for two different assets over a period of time throughout the year. We've gone through and calculated the arithmetic means for each. Now what we need to do is go through and determine the covariance of these two assets. The covariance tells us how much these assets move in sink with one another. A positive covariance means the two assets will tend to move up at the same time. An extreme example of this would be say…

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