How to Use the COVAR Function in Excel
The COVAR function is a statistical tool used in both Excel and Google Sheets to compute the covariance between two sets of values. Covariance gauges the extent to which two variables fluctuate in unison. If the covariance is positive, it indicates that the variables generally move in the same direction, whereas a negative covariance suggests that they move in opposite directions.
Syntax:
The syntax for the COVAR function is consistent across both Excel and Google Sheets:
=COVAR(array1, array2)Parameters:
array1: The first set of values.array2: The second set of values. It is crucial that both arrays contain an identical count of data points.
Examples:
To illustrate the use of the COVAR function, consider the following two data sets:
| X | 5 | 10 | 15 | 20 | 25 |
|---|---|---|---|---|---|
| Y | 3 | 7 | 12 | 18 | 22 |
In this example, we seek to determine the covariance between sets X and Y:
=COVAR(B2:B6, C2:C6)Here, B2:B6 denotes array1 (X values), and C2:C6 indicates array2 (Y values).
The resulting calculation will reveal the degree to which these datasets vary together.
Use case:
The COVAR function is especially useful in financial analysis to evaluate the relationship between the returns of different securities. If two assets have a positive covariance, they are likely to move in the same direction, which may indicate a lack of diversification. Conversely, a negative covariance between assets suggests a diversification benefit.
By utilizing the COVAR function to determine covariance, investors and analysts can gain insights into the risk characteristics of their portfolios, enabling them to make more strategic decisions regarding asset diversification.
More information: https://support.microsoft.com/en-us/office/covar-function-50479552-2c03-4daf-bd71-a5ab88b2db03