- #1

grmnsplx

- 38

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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, where

**a**

_{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

**M**°

_{correlation}**P**=

_{1}**X**and

_{1}**M**°

_{correlation}**P**=

_{2}**X**

_{2}**X**and

_{1}**X**

_{2}****

*Corr*(X_{1},X_{2}) =*Corr*(P_{1},P_{2})I have done this for several portfolios and what I arrive at

*looks*right, but I am not sure if it

*is*right. Am I out to lunch? Thoughts?

Much appreciated.