# Questions tagged [covariance]

A measure of the degree of linear association between a pair of random variables.

97 questions
Filter by
Sorted by
Tagged with
896 views

### Correlation of asset to portfolio, given certain variables

Ultimately I'm trying to calculate stdev contribution, but I've hit a hurdle. What I have: 20x20 correlation matrix for various assets Standard deviations for each asset Returns for each asset ...
701 views

### Negative variance?

Using the formula w*Cov*t(w) I can generate a negative portfolio variance. What are the implications of a negative variance? Should I just assume it's zero? A negative variance is troublesome ...
4k views

### Using CAPM to find correlation of two assets with each other

I stumpled upon an exercise in an investments book: The data below describe a three-stock financial market that satisfies the single-index model. ...
369 views

### How to score a portfolio's diversity based on security returns?

What is the best way to score a portfolio's diversity based on it's returns covariance matrix? I know that if my portfolio has two securities and their returns' correlation coefficient is -1 that is ...
107 views

### Why the weight vector of 'global minimum variance' the 'eigenvector' with the minimum eigenvalue?

Question Why is it the case that the weight vector of the global minimum variance portfolio the eigenvector of the covariance matrix with the smallest eigenvalue? Question with more details I ...
92 views

### Co-variance of Portfolio A with Portfolio B

I'm trying to calculate the correlation between two separate portfolios. I've used A*COV(AB)*B to calculate the co-variance of each portfolio where: A = Array ...
1k views

### What is the covariance of two correlated Ornstein-Uhlenbeck processes?

What is the covariance of two correlated Ornstein-Uhlenbeck processes? I was trying correlation(1,2)*Var1^(1/2)*Var2^(1/2), but I am not sure! I took Var1=(sigma1^2/(2*speedofmeanreversion1))*(1-exp(-...
125 views

### To understand FOMC events and its impact on the market

Last month when FOMC meeting decision went out that fed would start to exit QE3, immediately we saw a deleveraging effect: SPY went down, GLD went down, and LQD (bond) went down, but US dollars went ...
278 views

122 views

### Interest rate risk using copulas

In order to simulate an interest rate yield curve, can I just estimate a covariance matrix of historical key rate data, simulate with a normal copula, spline my simulated key rates, then price my ...
112 views

### Explanations regarding Minimum Variance Portfolio

I am sorry in advance if this question seems a bit stupid but during my class my lecturer said that: "The traditional estimator of the variance-covariance matrix is the sample covariance. However ...
303 views

### How can I forecast future correlation?

There are some standard models for forecasting volatility (e.g., GARCH) and for forecasting returns (e.g., factor models). What kind of standard models exist for forecasting future correlation between ...
247 views

### Calculate control variate for monte carlo simulation

For an exercise I need to calculate $\mathbb{E}[X]$ with a Monte Carlo simulation. I need to use control variate $Y$ with $\text{Var}(Y)=2$ and $\text{Cov}(X,Y)=1$. I am asked to give the optimale ...
15k views

### Annualized Covariance

I have two time series. One with monthly returns on an asset and one with monthly returns on a benchmark index. I have calculated the covariance using the ...
63 views

30 views

### Mean-Variance Optimization - Appropriate to use covariance of daily returns if strategy involves fixed hold of 3 months?

I'm implementing the strategy outlined Quantitative Momentum (Gray & Vogel), which basically involves investing each quarter in a set of "high-quality momentum stocks" for a fixed 3-month hold ...
34 views

### Cross-Sectional Multi-Index Model

I'm unsure how to find the covariance matrix in part (b) and what the residual deviations are. Any tips on how to tackle this?
350 views

### Correlation of asset X with a portfolio of asset Y and Z [closed]

I have three assets and a covariance matrix. How do I calculate the correlation of asset X with a portfolio that includes assets Y and Z? For example, assume I want to calculate the correlation of ...