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# Questions tagged [covariance]

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

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### 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. ...
349 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 ...
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### Is a more robust Covariance estimation possible?

I'm working on a mean-variance optimization problem, but instead of financial securities I'm choosing a 'portfolio' of N athletes. It is a 1-period optimization problem over one generic statistic ...
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 ...
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### 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(-...
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### 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 ...
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### Ledoit-Wolf Shrinkage estimator not giving positive definite covariance matrix

I used ten year daily data for 407 stocks and computed the daily and monthly covariance matrices. Since I have more variables than observations for the monthly matrix, I wasn't surprised to find the ...
120 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 ...
105 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 ...
297 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 ...
242 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 ...
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### 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 ...
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### 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?
318 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 ...