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Imposing diagonality of error covariance matrix when the CAPM holds

The notation $\Sigma$ is often used for covariance matrix Var($r_t$). Using notation $\Psi_t = \text{Var}(\epsilon_t)$, a common modeling assumption is that the residuals are independent, $\epsilon_{i,...
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Calculating variance of long/short portfolio

I think your are really asking how to normalize the weights. For example, $$ \begin{align} w_\textrm{usd} &= \begin{bmatrix} 100 \\ 50\\ -200\\ 51 \end{bmatrix},\\ &~\\ w^\prime &= \frac{...
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