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Correlation or Covariance Matrix

 
Post new topic   Reply to topic     Anthony's VBA Forum Index -> Portfoilio Optimization
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Frans



Joined: 10 Jan 2006
Posts: 1

PostPosted: Tue Jan 10, 2006 12:12 pm    Post subject: Correlation or Covariance Matrix Reply with quote

Hi,

The VBA code on portfolio optimization is beautiful. I am trying to work it out, but I have a question.

step 1: I take daily close prices of a certain stock
step 2: I calculate the daily returns on these stocks
step 3: In Excel I calculate the Covariance matrix on these daily returns via the Data Analysis add-in.
step 4: I enter the estimated returns and hit the macro button.

Is it correct that I use a Covariance Matrix on the daily returns on the stocks or should it be a correlation matrix? In your example it says Variance...

Thanks for your help.
Frans
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PostPosted: Wed Feb 01, 2006 11:57 am    Post subject: Reply with quote

You should use the covariance. Usually you have to annualized the variance and the covariance (as well as the return).

Variance is the variance on the stock itself.
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