**conditional and unconditional probabilities**. In this post today we take the probability concepts series forward and look into covariance and correlation and the math of permutations and combinations.

## **Covariance and Correlation:**

Covariance is a measure of quantitative analysis that measures the movement of one variable in relation to another variable. Eg: How do stocks A and B move with each other. When one moves up does the other also move up or down or and by what measure. Covariance is measured in square units and therefore is difficult to handle. Therefore it has been standardised by dividing the covariance by the standard deviations of the two variables. The standardised form is called correlation coefficient or just correlation and this measure does not have any units.

**Permutations and combinations:**

Permutations is how many ways can r items be selected from n items __if the order of selection is important__.

Combinations refer to in how many ways can r items be selected from n items __if the order of selection is not important.__

The formula for combination is given as,

n! / (n-r)! * r!

that’s all in this post guys….over the next two posts we will look into **discrete and continuous randon variables** and **various probability distributions**….stay tuned by subscribing to this blog or its push notifications…bye..

**For solved examples please refer to the CFA Institute Books and Schweser CFA notes. The problems can be easily solved using the CFA institute approved financial calculators. Please refer to the CFA exam policy and CFA calculator guide.**