Description
Multiply both weights by covariance, with factor one for sameAsset and two otherwise.
Risk and sensitivity terms depend on return units, horizon and model structure. A covariance contribution or local price approximation describes only part of a portfolio or instrument's risk and does not establish a safe investment.
Multiply both weights by covariance, with factor one for sameAsset and two otherwise.
When to use this tool
Use Portfolio Variance One Covariance Term when you need one explicit risk or sensitivity term.
How to use the tool and how it works
- Enter firstWeight, secondWeight, covariance, sameAsset. Use the units and conventions below.
- Run the tool. Correct any format, range, or cross-field input error before interpreting the output.
- Read varianceContribution. Use the output convention below.
Multiply both weights by covariance, with factor one for sameAsset and two otherwise.1
| Input field | Meaning and units | Accepted input |
|---|---|---|
| firstWeight | First Weight | Required. Finite number. |
| secondWeight | Second Weight | Required. Finite number. |
| covariance | Covariance | Required. Finite number. |
| sameAsset | True uses one diagonal contribution; false combines the two symmetric covariance terms. | Required. Boolean. |
| Output field | Interpretation | Returned shape |
|---|---|---|
| varianceContribution | Variance Contribution | Required. Finite number. |
{
"input": {
"firstWeight": 0.4,
"secondWeight": 0.6,
"covariance": 0.01,
"sameAsset": false
},
"output": {
"varianceContribution": 0.0048
}
}Limitations and assumptions
- This is one diagonal term or combined symmetric off-diagonal pair, not full portfolio variance. Covariance must use compatible return units and period; flags and matrix validity are not verified.
- Inputs must satisfy both the field types and the cross-field conditions above. Invalid input causes an error; a successful false flag or documented placeholder is a different result.
- Numeric calculations use binary floating point unless exact decimal-integer arithmetic is explicitly stated. No hidden measurement tolerance or decimal rounding is added; nonfinite or out-of-contract results are rejected. Numeric signed-zero results are exported as zero.
Alternative or Complementary methods
Use the complete portfolio or instrument model, including covariance consistency, nonlinear effects and scenario analysis. Verify scaling and estimation assumptions before interpreting a partial term as total risk.
References
Similar or alternative tools
- Asset Correlation Covariance Unit Crosswalk
Multiply correlation by volatilities for covariance, then by both scales.
- Duration Yield First Order Price Gap
Apply -price×modifiedDuration×yieldChange and optionally half×price×convexity×yieldChange²; add terms to price.