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Co-Movement / Co-Variation Definition


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Co-Movement / Co-Variation

The tendency of two variables, e.g. the returns from two investments, to move in parallel. It can be measured using either:
(i) The Correlation Coefficient: a relative measure of co-movement that locates assets on a scale between -1 and +1. Where returns move exactly in unison, perfect correlation exists, and where exactly opposite movements occur, perfect negative correlation exists. Most investments fall in between, generally, with positive correlation.
(ii) The Covariance: an absolute measure of co-movement with no upper or lower limits.

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