How can you change correlation into covariance?

The relationship between correlation and covariance is rooted in their definitions. Correlation measures the strength and direction of a linear relationship between two variables, while covariance indicates the direction of a linear relationship between the variables and is influenced by the scale of the data.

To convert correlation into covariance, you must recognize that correlation is scaled by the standard deviations of the two variables. Specifically, the formula for covariance can be expressed as the product of the correlation coefficient and the standard deviations of the two variables involved. Therefore, multiplying the correlation coefficient by the product of the standard deviations yields the covariance.

This understanding is essential for applying these concepts in various financial analyses where both measures are used to ascertain relationships between asset returns, risk, and investment strategies.