Covariance is a statistical measure of the extent that 2 variables move in tandem relative to their respective mean (or average) values. In the investment world, it is important to be able to measure how different financial variables interact together.
Modern Portfolio Theory (MPT) is an investment theory whose purpose is to maximize a portfolio’s expected return by altering and selecting the proportions of the various assets in the portfolio.
The golden rule of stock investing dictates cutting your losses when they fall 10 percent from the price paid, but common wisdom just might be wrong. Instead, use some common sense to determine if it’s time to hold or fold.
Your ideal investment or investment portfolio gives you the most opportunity for the risk you can bear. In this sense, it is important to understand the risk inherent in an investment before you look for the opportunity.
In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of its constituents.