The major difference between the correlation coefficient and the covariance is that the correlation coefficient:
A) can be positive, negative, or zero, whereas the covariance is always positive.
B) measures the relationship between securities, whereas the covariance measures the relationship between a security and the market.
C) is a relative measure showing association between security returns, whereas the covariance is an absolute measure showing association between security returns.
D) is a geometric measure, and the covariance is an arithmetic measure.

Question

Quizplus · Accepted Answer

The correlation coefficient is a standardized measure of the strength and direction of the relationship between two variables, making it a relative measure. Covariance, on the other hand, is an absolute measure that indicates the direction of the linear relationship between variables but not the strength.

The Major Difference Between the Correlation Coefficient and the Covariance