On the inverse of the covariance matrix in portfolio analysis
AbstractThe goal of this study is the derivation and application of a direct characterization of the inverse of the covariance matrix central to portfolio analysis. As argued below, such a specification of the inverse, in terms of a few primitive constructs, helps clarify the determinants of such key concepts as (1) the optimal holding of a given risky asset, (2) the slope of the risk-return efficiency locus faced by the individual investor, and (3) the pricing of risky assets in the Capital Asset Pricing Model. The two building blocks of the inverse turn out to be the non-diversifiable part of each asset's variance and the multiple regression and correlation coefficients obtained by regressing each asset's excess expected return on the set of excess expected returns of all other assets.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 528.
Date of creation: 1995
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew C. Harvey, 1990. "The Econometric Analysis of Time Series, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 026208189x.
- Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-96, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs).
If references are entirely missing, you can add them using this form.