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Variance, Covariance and Correlation

This article provides an in-depth understanding of the nature of volatility and correlation as well as the assumptions that we make when using these measures to analyse portfolio risk. In details, the post introduces:

  • definition of variance and volatility and correations
  • techniques for scaling volatilities and covariances and the square-root of time rule
  • volatility scaling with autocorrelation assumption
  • an exhaustive list of correlation pitfalls when measuring non-linear dependencies

 

Find the source code for this article in the offical Github repository at the link: github.com/gbaglini/baglinifinance

Gianluca Baglini
Gianluca Baglini

Quantitative Researcher & Investment Analyst

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