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Covariance and Correlation: Multiple Random Variables

Covariance and correlation describe how two random variables deviate from their expected values together. Covariance is measured in the variables' units multiplied together, while correlation is dimensionless. Correlation is 1 or -1 when the variables are perfectly linearly related, and covariance is the variance when a variable is correlated with itself. While theoretically linked, sample estimates of covariance and correlation are not simply related and need separate treatment.

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80 views2 pages

Covariance and Correlation: Multiple Random Variables

Covariance and correlation describe how two random variables deviate from their expected values together. Covariance is measured in the variables' units multiplied together, while correlation is dimensionless. Correlation is 1 or -1 when the variables are perfectly linearly related, and covariance is the variance when a variable is correlated with itself. While theoretically linked, sample estimates of covariance and correlation are not simply related and need separate treatment.

Uploaded by

Ahmed Alzaidi
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Covariance and correlation

In probability theory and statistics, the mathematical concepts of covariance and correlation are very
similar.[1][2] Both describe the degree to which two random variables or sets of random variables tend to
deviate from their expected values in similar ways.

If X and Y are two random variables, with means (expected values) μX and μY and standard deviations σX and
σY, respectively, then their covariance and correlation are as follows:

covariance
correlation ,

so that

where E is the expected value operator. Notably, correlation is dimensionless while covariance is in units
obtained by multiplying the units of the two variables.

If Y always takes on the same values as X, we have the covariance of a variable with itself (i.e. ), which is
called the variance and is more commonly denoted as the square of the standard deviation. The
correlation of a variable with itself is always 1 (except in the degenerate case where the two variances are zero
because X always takes on the same single value, in which case the correlation does not exist since its
computation would involve division by 0). More generally, the correlation between two variables is 1 (or –1) if
one of them always takes on a value that is given exactly by a linear function of the other with respectively a
positive (or negative) slope.

Although the values of the theoretical covariances and correlations are linked in the above way, the probability
distributions of sample estimates of these quantities are not linked in any simple way and they generally need
to be treated separately.

Multiple random variables


With any number of random variables in excess of 1, the variables can be stacked into a random vector whose
i th element is the i th random variable. Then the variances and covariances can be placed in a covariance
matrix, in which the (i,j) element is the covariance between the i th random variable and the j th one. Likewise,
the correlations can be placed in a correlation matrix.

Time series analysis


In the case of a time series which is stationary in the wide sense, both the means and variances are constant
over time (E(Xn+m) = E(Xn ) = μX and var(Xn+m) = var(Xn ) and likewise for the variable Y). In this case the
cross-covariance and cross-correlation are functions of the time difference:

cross-covariance
cross-correlation
If Y is the same variable as X, the above expressions are called the autocovariance and autocorrelation:

autocovariance
autocorrelation

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