Covariance

The covariance matrix describes the magnitude of the variability in the assets' returns including direction and degree.

The covariance of two assets is the standard deviations of the two assets multiplied by their correlation coefficient.

Combinations of assets with low covariance to other assets will result in portfolios with lower levels of portfolio risk. Combinations of assets with high covariance to other assets will result in portfolios with higher levels of portfolio risk.