Covariance is a statistical measure that indicates the extent to which two variables change together. If both variables tend to increase or decrease simultaneously, the covariance is positive. Conversely, if one variable increases while the other decreases, the covariance is negative. This concept helps in understanding the relationship between variables in data analysis. In finance, covariance is often used to assess the relationship between the returns of different assets, such as stocks or bonds. By analyzing covariance, investors can make informed decisions about portfolio diversification and risk management, particularly when considering assets like stocks and bonds.