Was a question on to calculate covariance between 2 markets. Completely had a brain fart on how to do this and where the formula is from?
M12 = (1.20 × 0.90 × 0.0225) + (0 × 0 × 0.0025) + [(1.20 × 0) + (0 × 0.90)] × 0.0022 = 0.0243.
Exhibit 1: Factor Covariance Matrix
Global Equity
Global Bonds
Global equity
0.0225
0.0022
Global bonds
0.0022
0.0025
Exhibit 2: Market Factor Sensitivities and Residual Risk
Sensitivities
Global Equity
Global Bonds
Residual Risk
Market 1
1.2
0
12.00%
Market 2
0.9
0
7.00%
Market 3
0
0.95
1.80%
Can anyone point it to me as to where I can reference this in the material/explain it.
M12 = (1.20 × 0.90 × 0.0225) + (0 × 0 × 0.0025) + [(1.20 × 0) + (0 × 0.90)] × 0.0022 = 0.0243.
Exhibit 1: Factor Covariance Matrix
Global Equity
Global Bonds
Global equity
0.0225
0.0022
Global bonds
0.0022
0.0025
Exhibit 2: Market Factor Sensitivities and Residual Risk
Sensitivities
Global Equity
Global Bonds
Residual Risk
Market 1
1.2
0
12.00%
Market 2
0.9
0
7.00%
Market 3
0
0.95
1.80%
Can anyone point it to me as to where I can reference this in the material/explain it.