Timeline for Excess Return Covariance Matrix is Singular - Cash return and risk free rate are the same [closed]
Current License: CC BY-SA 4.0
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| when toggle format | what | by | license | comment | |
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| Apr 27 at 13:18 | history | closed |
Kermittfrog Dimitri Vulis Kevin |
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| Apr 24 at 11:57 | answer | added | KaiSqDist | timeline score: 2 | |
| Apr 24 at 9:32 | comment | added | Farrep7 | Yes it would. You are right in general. However, I'm using it as part of a Black-Litterman model and my premise has been there is a choice for allocating to Cash. I want to include that choice in the model, as a PM has the opportunity to allocate to stocks or bonds or cash depending on their outlook. But, allowing this choice and having no alternative for a long term cash return in Euro other than Euribor is causing this 0 excess return and covariance problem. | |
| Apr 24 at 9:18 | comment | added | Rylan | It looks like you're defining excess returns as excess returns over cash, which you assume earns the Euribor rate. In this sense cash returns aren't a random variable, they're identically zero. If you're doing some sort of mean/variance optimization, that means that for example the portfolio with 50% equities, 50% bonds will have the same Sharpe as the portfolio with 40% equities, 40% bonds, 20% cash. Would it be sensible to exclude cash from your analysis if its excess returns are always 0? | |
| Apr 24 at 8:47 | review | Close votes | |||
| Apr 27 at 13:18 | |||||
| S Apr 24 at 8:15 | review | First questions | |||
| Apr 24 at 13:02 | |||||
| S Apr 24 at 8:15 | history | asked | Farrep7 | CC BY-SA 4.0 |