A statistic that measures the relationship between the movement of two asset prices. If two stocks are rising and falling together, they are said to have a positive covariance. But when they move opposite of each other, the covariance is said to be negative. Covariance is an important tool in portfolio management and is used to determine which securities should be included in the same portfolio. This is a way to reduce risk and volatility by having a relatively equal amount of securities that have negative covariances (reducing the likelihood the entire portfolio could plummet in the event of a downturn).