Cov ij

Covariance( )and Correlation(ρij @ rij)

The correlation coefficient is obtained by standardizing (dividing) the covariance by the product of the individual standard deviations
Computing correlation from covariance:

(r OR  )
ij ij
• The coefficient can vary in the range +1 to -1.

• A value of +1 would indicate perfect positive correlation. This means

that returns for the two assets move together in a positively and
completely linear manner.

•A value of –1 would indicate perfect negative correlation. This means

that the returns for two assets move together in a completely linear
manner, but in opposite directions.
Standard Deviation of a Portfolio
Variance of portfolio
•Variance for 2 Assets
Symbol for Covij =  ij

Since Covij  rij i j same as Covij  ij i j

It can be written:

Symbol for rij = ij

OR
•Variance for 3 Assets

Symbol for “Cov” similar as this symbol “ ”

Cov = 
ij ij

Since Covij  rij i j same as Covij  ij i j

Therefore variance portfolio can be written 2 ways:

2 2 2 2 2 2 2
 port  w1  1  w 2 2  w 3 3  2 w w r12 1 2  2 w w r13 1 3  2 w w r23 2 3
1 2 1 3 2 3
OR with different symbol
Determination of right weight for minimum variance portfolio

Since