Covariance

Covariance is defined as relationship between two random variables or how one variable behaves as per the movement of another variable. Covariance can be positive or negative.

If one variable moves in same direction as other variable, then the variables have positive covariance while if one variable moves in one direction and other variable moves in opposite direction the variables have negative covariance.

Example: Size and price of house, in general it is observed as area of house increases price also increases therefore the area and house have positive covariance. The other example could be if temperature increases then amount of heater consumption decreases that shows negative covariance.

Equation of Covariance

Cov(X,Y)      =      (∑(Xi-Xmean)(Yi-Ymean))/N