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On the inverse of the covariance matrix in portfolio analysis

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  • Guy V. G. Stevens

Abstract

The goal of this study is the derivation and application of a direct characterization of the inverse of the covariance matrix central to portfolio analysis. As argued below, such a specification, in terms of a few primitive constructs, provides new and illuminating expressions for such key concepts as the optimal holdings of a given risky asset and the slope of the risk-return efficiency locus faced by the individual investor. The building blocks of the inverse turn out to be the regression coefficients and residual variance optained by regressing the asset's excess return on the set of excess returns for all other risky assets.

Suggested Citation

  • Guy V. G. Stevens, 1997. "On the inverse of the covariance matrix in portfolio analysis," International Finance Discussion Papers 587, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:587
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    Risk;

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