The Covariance Explained in One Minute: Definition, Formula and Examples

Simply put, the covariance tells us if two variables such as the ones presented in this video's main example move in the same direction.
Among other things, we use the covariance to calculate the correlation coefficient, which also tells us to which degree the two variables move together (but more on that in a future video... for now, we'll focus exclusively on explaining the covariance).
In this video, we take things one step at a time so as to explain the covariance properly. On the one hand, we start with the definition of the term accompanied by examples and on the other hand, we also try to meaningfully understand the covariance formula.
Like with many other statistics terms, wrapping your head around the covariance is quite difficult if it is not explained to you properly, with your professor simply shoving a formula down your throat.
However, if you take the time to understand the covariance logically and in a way which ensures you won't forget all about it by next week, you'll realize it's actually not that difficult.
A definition here, a formula there and some carefully-chosen examples sprinkled in: bam, you now understand the covariance and will actually be able to explain it to others in a non-cringeworthy manner. All it takes is... you've guessed it: one minute of your time :)

[@OneMinuteEconomics]

GiganticWebsites.com is a project through which I make it possible for people to build truly gigantic websites (thousands of articles each!) at ridiculously low prices. If you have a great domain you want to turn into an amazing website or an existing site you'd like to upgrade/scale, visit our website or check out the One Minute Economics presentation video below: kzbin.info/www/bejne/nXabqniFhquArNE Please note that this comment is not an ad for a third-party service provider. GiganticWebsites.com is my baby 100% and I will personally be involved in each and every project so as to ensure the website turns out great :)

[@85aayush5]

Wtf!! How can you clear my whole concept in just a couple of minutes... amazinggggggggggggggggggggggggggggggg!!!!!!!

[@OneMinuteEconomics]

'tis a gift :D

[@Timbone07]

Haven't heard in years. Thanks for the refresher. An informative video. The class would have been simpler if my lecturer simplified things like you did but then again maybe I am just smarter now lol

[@OneMinuteEconomics]

Really happy you found it useful and understood the concept Timbone! I've always (more or less) jokingly stated that if you're numbers-savvy and hate people, you should become a statistics professor, heh. I'll try to publish more statistics-related videos on the channel because IMO, there's a meaningful need for statistics videos where the goal is simply getting the message across properly and helping people actually understand the concept rather than trying to sound smart by over-complicating things. Will be publishing one on the correlation coefficient next, hopefully some more to come this year :)

[@karanveer033]

One Minute Economics hey if you're making one on correlation of coefficient.... Then please in the same video tell us the difference between that and Covariance and its applications in Finance... Cheers

[@OneMinuteEconomics]

I've just finished the script for the correlation coefficient video today haha, the video will definitely go live this month :)

[@karanveer033]

Hey man, loved your content as usual..... Can you also cover such statistics topics like, Sharpe Ratio, Roy's safety first criterion ratio, etc.... Thanks

[@OneMinuteEconomics]

Thanks a lot for the kind words Karan, will do my best!

[@OneMinuteEconomics]

If you liked this video, I think you'll love The Age of Anomaly, my Wall Street Journal and USA Today best-selling book about preparing for financial calamities (whatever they may involve). You can buy it over at: 1) Amazon: www.amazon.com/Reasonable-Case-Bitcoin-Andrei-Polgar-ebook/dp/B09G6Z45QB 2) Barnes & Noble: www.barnesandnoble.com/w/the-age-of-anomaly-andrei-polgar/1127084693?ean=2940155383970 3) Apple Books: books.apple.com/us/book/the-age-of-anomaly-spotting-financial-storms-in/id1331704265 4) Kobo: www.kobo.com/ww/en/ebook/the-age-of-anomaly-spotting-financial-storms-in-a-sea-of-uncertainty

[@adnan.q.753]

Amazing!

[@OneMinuteEconomics]

Thank you Adnan :)

[@alexdaimari756]

Thank you SIR...🤟😎🎉

[@OneMinuteEconomics]

You're more than welcome Alex, thanks a lot for the kind words :)

[@justforknowledge6367]

Thank you. Is their a limit, a least upper bound or the highest lower bound to the covariance value? Are there any restrictions to the value?

[@TheNBSPerry]

1 and -1. 1 being perfect correlation and -1 being perfect negative correlation

[@prithvidhyani1991]

@@TheNBSPerry I think he was asking about covariance not correlation. and no there are no bounds on this value.

[@user-zx7vh6mp8n]

@@prithvidhyani1991 How do covariance vary? In this eg. how do we evaluate this covariance? Is this High or Low?

[@mitchellyoung8561]

Talk about rounding down!

[@anchalsharma6075]

Thanq so much sir ☺

[@OneMinuteEconomics]

Thank YOU for the kind words :)

[@samcrazecomedy1691]

Nice content, I just learnt something new. Thanks 🙏

[@OneMinuteEconomics]

Music to my ears, thanks a ton for the kind words :)

[@pussiestroker]

Surely "Covariance tells us if variables are positively or inversely related" is a lot better than "covariance is a measure of the joint variability of two random variables." from the wiki entry.

[@OneMinuteEconomics]

:)

[@cocoarecords]

amazing

[@OneMinuteEconomics]

Glad you like it :)

[@malikmedical1183]

thanks sir

[@OneMinuteEconomics]

You are more than welcome Malik :)

[@silviyaivanova218]

Thank u so much , i finally got it!

[@OneMinuteEconomics]

That's what I love to hear, you're more than welcome :)

[@latanezimbardo7129]

didn't know that Dwight teaches statistics

[@OneMinuteEconomics]

I've waited over a year for someone to say this in a comment haha :D

[@latanezimbardo7129]

@@OneMinuteEconomics hey Dwight, please teach us how to grow beets too

[@iganic7574]

N-1 ????? Why

[@ty_vorhies]

“Degrees of Freedom” - for Population, you divide by n. For a Sample, you divide by n - 1. You remove 1 degree of freedom for a Sample

[@ty_vorhies]

This might help: kzbin.info/www/bejne/gZzEhmWrp5iMo9k

[@MrOdsplut]

That's 2 minutes

[@OneMinuteEconomics]

Format-wise, it's all good as long as you start by saying "one minute" when pronouncing the length of the video... even if it's "one minute and fifty-nine seconds" :D