hard · Quantitative Finance numerical
In the two-asset case with volatilities σ_1, σ_2 and correlation ρ, what does the denominator of the weight formula σ_1^2 + σ_2^2 - 2ρσ_1σ_2 represent in matrix terms?
- The trace of the covariance matrix, summing only the variance terms.
- The sum of all elements in the covariance matrix Σ for the weights (1, -1).
- The determinant of the 2x2 matrix, sigma_1^2 sigma_2^2 (1 minus rho squared).
- 1 transpose Sigma 1 for a normalized long-short vector, not the min-variance weights.
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