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I'm trying to find a covariance matrix, so when i use returns.cov() on my returns variable, I get a good result. Unfortunately, when i want to use .cov() on my np array converted from pandas df, i must use np.cov(array). But then, i get a completely different matrix, that is not even the dimensions that it should be. How to get a normal covariance matrix while using np.cov(array) or how to convert this crazy matrix into a normal one? Here is my code:

returns = np.log(data).diff()
cov_matrix = returns.cov()
cov_matrix

Output:

            GE      MSFT       JNJ         K        BA       IBM
GE    0.103503  0.075849  0.022159 -0.004298  0.085745  0.012300
MSFT  0.075849  0.165744  0.041228 -0.005173  0.037925 -0.002240
JNJ   0.022159  0.041228  0.035968  0.018111  0.010101 -0.003933
K    -0.004298 -0.005173  0.018111  0.056953 -0.007621 -0.004619
BA    0.085745  0.037925  0.010101 -0.007621  0.089571  0.024823
IBM   0.012300 -0.002240 -0.003933 -0.004619  0.024823  0.018391

here is the other code using np.cov(array):

cov_matrix = np.cov(returns)
cov_matrix

output:

array([[        nan,         nan,         nan,         nan,         nan,
                nan,         nan,         nan,         nan,         nan,
                nan,         nan],
       [        nan,  0.08709179, -0.02110741,  0.02440574,  0.028228  ,
         0.01615291, -0.00658686,  0.07601494,  0.03515373, -0.04674915,
        -0.03947769,  0.03605138],
       [        nan, -0.02110741,  0.02745833,  0.00419789,  0.00786532,
         0.00018428,  0.03678159, -0.00574526, -0.02711512,  0.01241536,
        -0.00982581, -0.01954344],
       [        nan,  0.02440574,  0.00419789,  0.02056029,  0.0081328 ,
         0.01348074,  0.0125812 ,  0.02001429,  0.00479978, -0.01069634,
        -0.02331694,  0.00175948],
       [        nan,  0.028228  ,  0.00786532,  0.0081328 ,  0.08130515,
         0.01101311,  0.07589644,  0.06730002, -0.04176551, -0.02758789,
        -0.04104097,  0.01693321],
       [        nan,  0.01615291,  0.00018428,  0.01348074,  0.01101311,
         0.02619104,  0.0244941 ,  0.0028883 , -0.01552481, -0.01530776,
        -0.0314189 ,  0.00692483],
       [        nan, -0.00658686,  0.03678159,  0.0125812 ,  0.07589644,
         0.0244941 ,  0.11670208,  0.03269149, -0.08127712, -0.01149054,
        -0.05617884, -0.00707836],
       [        nan,  0.07601494, -0.00574526,  0.02001429,  0.06730002,
         0.0028883 ,  0.03269149,  0.10320532,  0.01023065, -0.04249818,
        -0.04005964,  0.03031267],
       [        nan,  0.03515373, -0.02711512,  0.00479978, -0.04176551,
        -0.01552481, -0.08127712,  0.01023065,  0.0724934 , -0.0045111 ,
         0.02626014,  0.01213532],
       [        nan, -0.04674915,  0.01241536, -0.01069634, -0.02758789,
        -0.01530776, -0.01149054, -0.04249818, -0.0045111 ,  0.03077156,
         0.02965359, -0.02410751],
       [        nan, -0.03947769, -0.00982581, -0.02331694, -0.04104097,
        -0.0314189 , -0.05617884, -0.04005964,  0.02626014,  0.02965359,
         0.05648698, -0.01213576],
       [        nan,  0.03605138, -0.01954344,  0.00175948,  0.01693321,
         0.00692483, -0.00707836,  0.03031267,  0.01213532, -0.02410751,
        -0.01213576,  0.02393791]])
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    $\begingroup$ I'm not an everyday Python user. However, in terms of np.cov(returns), have you tried transposing your returns and observing whether it equates to the same covariance matrix when using pandas dataframe, ie. np.cov(returns.transpose())? Two other things: Remove the first row of your returns that is equal to "nan" (removes nan values of numpy covariance estimate) and moreover, when using numpy's covariance function, set "ddof=1" to get the unbiased covariance estimate. See documentation here. Does this make a difference? $\endgroup$
    – Pleb
    Feb 16, 2021 at 0:16
  • $\begingroup$ Man you are the boss!!! Tranposing the matrix solved the problem, I really don't know why that was sabotaging the whole function. I left nan values because I could not remove them using numpy. I needed to convert to pandas, use pandas.dropna, and then convert back to numpy. The reason is because returns = returns[~np.isnan(returns)] didn't work. Thanks one more time for helping me, and btw, do you know why I needed to transpose the matrix in this second situation? $\endgroup$
    – Luka Savić
    Feb 16, 2021 at 0:42

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