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

Question

Quizplus · Accepted Answer

The correlation coefficient measures the relative strength of the relationship between two variables while the covariance measures the absolute strength of the relationship. The correlation coefficient can range from -1 to +1, indicating a negative or positive relationship, or no relationship at all, while the covariance can only be positive.

The Major Difference Between the Correlation Coefficient and the Covariance