Reading 11- LOS A (Part 1): Q9 following, statements, class, regarding

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9.A sample covariance for the common stock of the Earth Company and the S& 500 is -9.50. Which of the following statements regarding the estimated covariance of the two variables is most accurate?

A)   The two variables will have a slight tendency to move together.

B)   The two variables will have a strong tendency to move in opposite directions.

C)   The relationship between the two variables is not easily predicted by the calculated covariance.

D)   The relationship between the two variables is highly predictable given the calculated covariance.

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The correct answer was C)

The actual value of the covariance for two variables is not very meaningful because its measurement is extremely sensitive to the scale of the two variables, ranging from negative to positive infinity. Covariance can, however be converted into the correlation coefficient, which is more straightforward to interpret.