Evaluates the total risk of the Market Portfolio.
A double equal to the risk of the Market Portfolio.
The (possibly constrained) asset weights of the Market Portfolio should be evaluated prior to the application of this method user MarketPortfolio.
Remark: The covariance matrix of the assets from which the Market Portfolio can be constructed will correspond to the covariance matrix used in the evaluated of the Efficient Frontier which must be evaluated before the Market Portfolio can be constructed.
Application time span and approaches to estimating the Covariance Matrix
The portfolio risk is an instantaneous quantity and therefore the covariances between the asset used within this method (and the Efficient Frontier) should also be instantaneous. However, in practice it is difficult to estimate the instantaneous value of the covariance matrix. We provide within the Asset Parameters class the following two methods:
The first approach is backward looking using the historical values and the second approach is forward looking. However, both approaches will tend to estimate the mean covariances over a period rather than the instantaneous value. This may not cause significant problems since in practice it is often an estimate of the risk over a period which is considered. However, in order to obtain the most suitable estimate for a given application the user should match the estimation procedure with the time period over which the estimate is desired. For example, if we desire to estimate the gain which diversification could have brought if a portfolio was rebalanced one month ago then the use of the historical approach using asset prices from the last month would be appropriate in the evaluation of the covariance.
CapitalMarket Class | Portfolio Namespace | CapitalMarket.MarketPortfolioRisk Overload List