The major difference between the correlation coefficient and the covariance is that the correlation coefficient:
A)can be positive,negative,or zero,whereas the covariance is always positive.
B)measures the relationship between securities,whereas the covariance measures the relationship between a security and the market.
C)is a relative measure showing association between security returns,whereas the covariance is an absolute measure showing association between security returns.
D)is a geometric measure,and the covariance is a statistical measure.

Question

Quizplus · Accepted Answer

The correlation coefficient is a relative measure, whereas the covariance is an absolute measure. The correlation coefficient adjusts for the scale of the variables, making it easier to interpret the strength of the relationship between them. In contrast, the covariance is affected by the units of measurement and can be difficult to compare across different datasets. Therefore, choice C is the best answer. The other choices are incorrect because the covariance can be positive, negative, or zero, it measures the relationship between two securities rather than one security and the market, and it is a statistical rather than a geometric measure.

The Major Difference Between the Correlation Coefficient and the Covariance