Example 2: State Probability 1 0.1 2 0.2 3 0.5 4 0.2 RA 6% 7% 8% 9% RB 5% 9% 6% 9% Find the covariance and the correlation coefficient between the returns of A and B. Covariance (CAB): measures how two random variables move together, or lack thereof. Correlation Coefficient (PAB): Note: Correlation coefficient is always between 1 and I. p=1 means perfect positive correlation. (The two variables move in the same direction perfectly.) p=-1 means perfect negative correlation. (The two variables move in opposite direction to each other perfectly.) p=0 means no correlation. (The two variables move randomly with respect to each other.)