Could anyone tell me when we need to use this formula? Thanks in advance!
when they ask you to caclulate the covariance of assets (i,j).
To find covariance of two asset classes, I think. It is in first reading on setting CME in Volume 3.
I guess I did not really frame my question well…what I wanted to ask is whether you use this formula when correlation is one between asset i and the market as well as between asset j and the market. If so, this is a little abstract for me…why do you have a correlation of one? Why does full segmentation dictate a correlation of one? Is there a more straightforward way to understand it? I’d appreciate your intuition.
Would anyone please help me understand why full segmentation dictates a correlation of one between the asset and the market?
Because the correlation in a full segmentation is only with the domestic market, which is 1. In full or partial integration, the correlation is against the world market.