City Research Online

Abstract

This short paper demonstrates how a covariance matrix estimated using log returns of multiple assets in their respective base currencies can be converted directly into a covariance matrix in a single common currency by using basic matrix multiplication. This approach eliminates the need to convert returns into a common currency, simplifying the estimation process. In addition to describing the conversion process, this note also addresses the conversion of covariances between two currencies. By applying the proposed methodology, asset managers can efficiently analyze the covariance between assets denominated in diverse currencies, saving time and resources. It is thus a valuable tool for asset managers seeking to optimize portfolio allocation across different currencies.

Publication Type:	Article
Additional Information:	Copyright © 2024, the authors.
Publisher Keywords:	Covariance matrix, multicurrency, portfolio selection, currency risk, risk estimation
Subjects:	H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management H Social Sciences > HG Finance
Departments:	Bayes Business School Bayes Business School > Finance
SWORD Depositor:	Symplectic Administrator

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