Beta - Covariance -Variance - Standard deviation - Correlation

CFA Level III
#1

Anyone else getting confused with all of them?

Im reviewing on capital market expetaitons. And it looks like Beta = Covariance / Variance of Market. This Covariance = Standard deviaiton i * Standard deviation of market * correlation.

Then Correlation between 2 assets is Beta1 * Beta 2 * Variance of market / Standard deviaiton 1 * Standard deivaiton 2.

Getting like 6 different formulas/wears ot break thingso ut mixed up…

#2

Where did you get the formula for the correlation (of returns) of two assets?

I think I’ve seen it before, and I’ve always hated it.

What you wrote doesn’t work (but I think it’s not your fault).

#3

cov of 2 assets = b1 * b2 * variance of market => when the market model is used.

correl = cov / (std 1 * std2) -> remains the same as before.

#4

Its all from the schweser books level 3 presentation materials or books… ill post the exact stuff tomorrow. Thanks!

#5

Am i incorrectly substituitng two things together that i shoudn’t?

This is from Schweser - capital market expectations for Singer Terhaar analysis.

So in the book, the definition of correlation (relationship between the covariance and correlation:

m = market

correlaiton (i,m) = Covariance (i,m) / (Standard deviation i * Standard deviaiton M)

Then it says Covariance (i,m), which is the numerator in the above equation = Correlationi,m * Standard deviation i * stardard deviation of M.

Then Beta = Covariance (i,m) / Variance (m)

From all of these, it looks like you are just comparing 1 country, to the overall market.

Now, in my schweser class notes, under FInnancial Equilibirum approach it says:

Covariance is: Betai, *Betaj, * variance(m)

So it looks like there there are 2 countries being compared to the overall market…

#6

Formula 1: Beta = Covariance (i,m) / Variance (m)

standard beta formula, market against 1 asset.

and correlation of i against market m = covariance (i,m) / [std(i) * std (m)]

Remember L 1 and 2 Regression - correlation / beta formula in your 1 variable Regression.

What you get here is the beta of the asset compared to market.

Formula 2: cov(i,j) = Betai, *Betaj, * variance(m)

2nd one is the market model (ICAPM) related -

  • and here you have 2 assets in the mix.

Beta i and beta j are defined by the standard formula above.

this formula provides you with the covariance of i against j

and correlation i, j = covariance i,j / [std (i) * std (j)]

#7

Thanks!

THis is bringing up bad memories of level 2. i remember a week before the exam, i started writing all these of market models and beta… and little did i know… it didn’t help on the exam : l

#8

These are some of the worst formulas to remember for level iii. No worries, there are not that many. Just write them down and try to give them a look from time to time. I learnt them 2 weeks ago but i already forgot

#9

I am also suffering from the same probelm - forgot every thing learned couple of weeks agao (sinking feeling)