 # Covariance and Correlation: Estimator/Sample Statistic: Population Parameter: Covariance and correlation measure linear association between two variables,

## Presentation on theme: "Covariance and Correlation: Estimator/Sample Statistic: Population Parameter: Covariance and correlation measure linear association between two variables,"— Presentation transcript:

Covariance and Correlation: Estimator/Sample Statistic: Population Parameter: Covariance and correlation measure linear association between two variables, say X and Y. The population parameter describes linear association between X and Y for the population. The sample statistic or estimator is used with sample data to estimate the linear association between X and Y for the population. Covariance:

Covariance 1.Create deviations for Y and deviations for X for each observation. 2.Form the products of these deviations. 3.The graph that follows illustrates these deviations. 4.In Quadrant 1, the products of deviations are positive. 5.In Quadrant 2, the products of deviations are negative. 6.Covariance – on average, what are the products of deviations? Are the positive or negative? 7.Covariance is not widely used, because the units are often confusing. We do need it for Portfolio Analysis – where all units are \$.