The total number of variance and covariance terms in portfolio is N². How many of these would be (including non-unique) covariances? A) N. B) N². C) N²- N. D) N²- N/2.

Question

Quizplus · Accepted Answer

For a portfolio with N assets, there are N variance terms (one for each asset). The total number of variance and covariance terms combined is N(N+1)/2. Since there are N variances, the number of covariance terms is N(N+1)/2 - N, which simplifies to N(N-1)/2, indicating that option C is a misinterpretation of the formula. The correct calculation for the number of covariances should be based on the formula for combinations of N items taken 2 at a time, which is N(N-1)/2, not directly subtracting N from the total number of terms.

The Total Number of Variance and Covariance Terms in Portfolio