Hello all. I am not a stats person so I would like some help/confirmation on this one.(adsbygoogle = window.adsbygoogle || []).push({});

What I am trying to achieve (if possible) is a metric on how two portfolios (or strategies) are correlated.

Imagine there are two portfolios of assets A,B,C,D... with different weights of each asset.

eg.P= (5, 2, 0, -3, ...) and_{1}P= (0, 3, 10, -5, ...)_{2}

(Read this as Portfolio one consisting of 5 of asset A, 2 of asset B, no asset C, -3 of asset D and so on. The negative values means that the portfolio is short that asset.)

Let the correlation coefficients of each asset pair be given such that we can construct a typical correlation matrix (NxN square matrix, wherea_{i,j}is the correlation coefficient for assets i and j).

I *think* that all I need to do is:

1. Multiply each portfolio vector by the correlation matrix

2. Calculate the correlation onf the two datasets (vectors)M°_{correlation}P=_{1}Xand_{1}M°_{correlation}P=_{2}X_{2}Xand_{1}X_{2}

Corr(X_{1},X_{2}) =Corr(P_{1},P_{2})

I have done this for several portfolios and what I arrive atlooksright, but I am not sure if itisright. Am I out to lunch? Thoughts?

Much appreciated.

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# Correlation of two portfolios given price correlations of assets

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