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Academic Journal of Business & Management, 2020, 2(8); doi: 10.25236/AJBM.2020.020807.

Application of Covariance Matrices in Financial Portfolio

Author(s)

Yingyue Lai

Corresponding Author:
Yingyue Lai
Affiliation(s)

Arnold O. Beckman High School, 59 Lowland Irvine, California, USA

Abstract

Covariance matrix is an important concept in both linear algebra and statistics. It is a square matrix that gives the covariance between element pairs of random vectors. Covariance is similar to but slightly different than the definition of correlation. It does not demonstrate the strength of a linear relationship as correlation (scale of -1 to +1) does, but it allows us to determine the directions of linear relationship between two random variables.

Keywords

Covariance matrix; random vectors; random variables

Cite This Paper

Yingyue Lai. Application of Covariance Matrices in Financial Portfolio. Academic Journal of Business & Management (2020) Vol. 2, Issue 8: 46-52. https://doi.org/10.25236/AJBM.2020.020807.

References

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[2] Hayes, Adam. “Portfolio Variance.” Investopedia, Investopedia, 12 Oct. 2020, www.investopedia.com/terms/p/portfolio-variance.asp.
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