covarianceMF {PortfolioAnalytics}

Covariance Matrix Estimate

Description

Estimate covariance matrix using a statistical factor model

Usage

covarianceMF(beta, stockM2, factorM2)

Arguments

beta

(N x k) matrix of factor loadings (i.e. the betas) from a statistical factor model

stockM2

vector of length N of the variance (2nd moment) of the model residuals (i.e. idiosyncratic variance of the stock)

factorM2

(k x k) matrix of the covariance (2nd moment) of the factor realizations from a statistical factor model

Details

This function estimates an (N x N) covariance matrix from a statistical factor model with k factors, where N is the number of assets.

Value

(N x N) covariance matrix