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Is tarah ke question mei jaha Portfolio variance nikalna hota hai under both Markovitz model and Sharpe Model, question mei covariance diya hua hai use hum Markovitz model mei to use karte hai but Sharpe model ke liye Covariance ko beta*beta*Variance of market wale formula se compute karke use karna hota hai…. What is the difference between these two covariances?
The difference between the two covariances used to calculate portfolio variance in the Markowitz model and the Sharpe model lies in what they capture:
Markowitz model covariance: This captures the total covariance between two assets, including both systematic (market-related) risk and unsystematic (asset-specific) risk.
Sharpe model covariance: This captures only the systematic risk, estimated using the asset’s beta and the market variance.
The Sharpe model simplifies the Markowitz model by assuming that all unsystematic risk can be diversified away through sufficient diversification. This allows for a more computationally efficient way to calculate portfolio variance, especially for portfolios with a large number of assets.
Here’s a table summarizing the key points:
In the context of the question
The question provides the covariance values directly, which are suitable for the Markowitz model. To use the Sharpe model, you would need to calculate the betas for each asset and then use the formula β * β * σ^2_M (beta * beta * market variance) to estimate the covariance between each asset and the market.