Co-variance

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Covariance is a statistical term that measures how much two random variables vary with each other (how much they ‘co-vary’). When two uncertain outcomes are positively related, covariance is positive and if negatively related, negative. The magnitude of covariance measures the strength of the common movement. Covariance, because it shows whether and to what extent two variables are statistically related, serves as one of the underpinnings of applied mathematics. In portfolio management, it is one of the basic tools used in building multi-factor risk models. See tracking error, active risk.

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