Variance, Covariance, Correlation

Variance, covariance, and correlation are the three statistics on which every portfolio construction method in this book ultimately rests. Variance measures how much one asset moves; covariance measures whether two assets move together; correlation rescales covariance onto a fixed $[-1,+1]$ range so that different pairs can be compared. Everything from the efficient frontier to beta to the Sharpe ratio is assembled from these three.