The co-variance matrix
You can easily compute the co-variance matrix of a DataFrame of returns using the .cov() method.
The correlation matrix doesn't really tell you anything about the variance of the underlying assets, only the linear relationships between assets. The co-variance (a.k.a. variance-covariance) matrix, on the other hand, contains all of this information, and is very useful for portfolio optimization and risk management purposes.
This is a part of the course
“Introduction to Portfolio Risk Management in Python”
Exercise instructions
- Calculate the co-variance matrix of the
StockReturnsDataFrame. - Annualize the co-variance matrix by multiplying it with 252, the number of trading days in a year.
Hands-on interactive exercise
Have a go at this exercise by completing this sample code.
# Calculate the covariance matrix
cov_mat = StockReturns.____
# Annualize the co-variance matrix
cov_mat_annual = ____
# Print the annualized co-variance matrix
____