Page 47 - FINAL CFA SLIDES DECEMBER 2018 DAY 3
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LOS 9.k: Calculate and interpret Session Unit 2:
covariance and correlation, p.183 9. Probability Concepts
What does it all mean?
To make the covariance of two random variables easier to interpret, it may be divided
by the product of the random variables’ standard deviations.
Key Properties of Correlation:
• Measures the strength of the linear relationship between two random variables.
• Has no units.
• The correlation ranges from –1 to +1. That is, –1 ≤ Corr(Ri, Rj) ≤ +1.
• If Corr(Ri, Rj) = 1.0, the random variables have perfect positive correlation.
• If Corr(Ri, Rj) = –1.0, the random variables have perfect negative correlation
• If Corr(Ri, Rj) = 0, there is no linear relationship between the variables, indicating
that prediction of Ri cannot be made on the basis of Rj using linear methods.
