University Institute of Engineering

DEPARTMENT OF COMPUTER SCIENCE

& ENGINEERING
Bachelor of Engineering (Computer Science & Engineering)
Subject Name :Business Intelligence
Subject Code: CST-421
Topic: Normal Distribution and Histograms
Covariance and correlation
By :Gagandeep Kaur
DISCOVER . LEARN . EMPOWER
Course Outcomes
CO-1:Describe the basics of insight
generation in Business Intelligence and
Data analytics, including the
foundations of quantitative insights and
the use of statistical methods like the
normal
CO-2: distribution
Analyze andand histograms.
interpret data
visualization techniques to
communicate insights and trends to
stakeholders effectively..
CO-3: Demonstrate proficiency in the
use of advanced charts and dashboards
to showcase complex data in a visually
appealing manner
CO-4: Evaluate the effectiveness of
different business intelligence
concepts, tools and applications for
decision making and decision support
CO-5: Design system..
and develop Business
Performance Management Systems,
considering the BI Maturity, Strategy,
and integrate them into a Summative
Project to showcase the skills gained
throughout the course.

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 CONTENTS
• Introduction Covariance and correlation
• Key Takeaways
• Formula for Covariance
• Types of Covariance
• Applications of Covariance

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 What Is Covariance?

• Covariance measures the directional relationship between the returns

on two assets. A positive covariance means asset returns move
together, while a negative covariance means they move inversely.
• Covariance is calculated by analyzing at-return surprises (standard
deviations from the expected return) or multiplying the correlation
between the two random variables by the standard deviation of each
variable.

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Key Takeaways
• Covariance is a statistical tool used to determine the relationship between the
movements of two random variables.
• When two stocks tend to move together, they are seen as having a positive
covariance; when they move inversely, the covariance is negative.
• Covariance is different from the correlation coefficient, a measure of the strength
of a correlative relationship.
• Covariance is an important tool in modern portfolio theory for determining what
securities to put in a portfolio.
• Risk and volatility can be reduced in a portfolio by pairing assets that have a
negative covariance.

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Formula for Covariance

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Types of Covariance
• Positive Covariance
• A positive covariance between two variables indicates that these variables tend to be higher or
lower at the same time. In other words, a positive covariance between stock one and two is
where stock one is higher than average at the same points that stock two is higher than average,
and vice versa. When charted on a two-dimensional graph, the data points will tend to slope
upwards.
• Negative Covariance
• When the calculated covariance is less than negative, this indicates that the two variables have an
inverse relationship. In other words, a stock one value lower than average tends to be paired with
a stock two value greater than average, and vice versa.

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Applications of Covariance

• Covariances have significant applications in finance and modern

portfolio theory.
• For example, in the capital asset pricing model (CAPM), which is used
to calculate the expected return of an asset, the covariance between
a security and the market is used in the formula for one of the
model's key variables, beta. In the CAPM, beta measures the volatility,
or systematic risk, of a security compared to the market as a whole;
it's a practical measure that draws from the covariance to gauge an
investor's risk exposure specific to one security.

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 References
• Books
• Data Strategy :How to profit from a world of Big Data Bemard Marr published by
KogenPage 2017
• Performance Dashboards-Monitoring and managing business by Wayne Eckerson
KogenPage 2019
• Web link:
• https://www.investopedia.com/terms/c/covariance.asp/

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THANK YOU