Covariance of two equity market

See many questions are asking about this kinds of problem.

What does covariance of two equity market really mean?

I already memorze the formula: Beta_i * Beta_j * (standard deviation of market)^2

However, i can image if the curve ball coming, I will miss it!!!

Larger => Risker ?

Covariance is a way to measure how “in sync” (or N’sync, if that’s your thing) two variables are. If it’s positive, then on average, they move in the same direction. If it’s negative, they move in opposite directions, on average. The magnitude of covariance is difficult to interpret without a reference, which is why we can use correlation or beta to get a better idea of what the magnitude of the covariance means. Also, if the covariance is positive (negative), the correlation between the variables is positive (negative).

In ur equation, what is the STD of the market?.. Is it market i or market j?..

neither i (market 1) or j (market 2). It is the VARIANCE of all markets together. (Var(m))

beta i = covariance (i,m) / var(m) = corr i,m * std i / std m

beta j = cov(j, m) / var (m) = = corr j,m * std i / std m

and cov i,j = beta i * beta j * var(m)

so, cov i,j = beta i * beta j * var(m) = cov(i, m) / var (m) * cov(j, m) / var (m) * var(m) = cov(i, m) * cov(j, m) / var (m) = (corr i,m * std i / std m * corr j,m * std j / std m) / var(m) laugh

cpk123 as helpful as ever,

is there a typo in the betaj line ?

beta j = cov(j, m) / var (m) = = corr j,m * std j / std m

std j not i

Or should I get my books out yet again?


I was being polite…as we know exact detail is important in formulas!

copy + paste error… sorry for not reviewing completely what I put in.