How Do You Calculate Covariance Of Stocks?
A properly diversified portfolio of stocks contains stocks that have a low correlation with each other. This means that when one stock goes up, the other one usually goes down. This helps reduce the volatility of your investments. When done correctly, your diversified portfolio will have the same rate of return as a more risky investment without the jarring ups and downs in value. Calculating the covariance of two stocks is the first step in calculating correlation and only requires high school math, but because there are a lot of data points, it is best to use a spreadsheet. Collect historical prices of the two stocks. Yahoo Finance (see link below) offers these prices. Copy and paste the historical prices of Stock 1 from a time period of your choosing into Column 1 of a spreadsheet. Look up the historical prices of Stock 2. Make sure to choose the same time period and interval (e.g. monthly) as Stock 1. Copy and paste these prices into Column 2 of your spreadsheet. Make sure that the
