Answer: The returns of two assets move in opposite directions.

## Explanation Negative covariance indicates that two variables tend to move in opposite directions. When one variable increases, the other tends to decrease, and vice versa. **Key points:** - **Covariance** measures the directional relationship between two random variables. - **Positive covariance** indicates that the variables move together in the same direction. - **Negative covariance** indicates that the variables move in opposite directions. - **Zero covariance** indicates no linear relationship between the variables. **Why other options are incorrect:** - **Option A**: "The returns of two assets move together in the negative direction" - This is incorrect because negative covariance doesn't mean both returns are negative; it means they move in opposite directions. - **Option C**: "The returns of two assets are move in the positive direction" - This describes positive covariance, not negative covariance. - **Option D**: "None of the above" - This is incorrect because option B is the correct answer. **Example**: If Asset A's returns increase when Asset B's returns decrease (and vice versa), they have negative covariance.

Author: Nikitesh Somanthe