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In finance, correlation trading is a strategy in which the investor gets exposure to the average correlation of an index.. The key to correlation trading is being able to predict when future realized correlation amongst the stocks of a particular index will be greater or less than the "implied" correlation level derived from derivatives on the index and its single stocks.
Under the assumption of normality of returns, an active risk of x per cent would mean that approximately 2/3 of the portfolio's active returns (one standard deviation from the mean) can be expected to fall between +x and -x per cent of the mean excess return and about 95% of the portfolio's active returns (two standard deviations from the mean) can be expected to fall between +2x and -2x per ...
Within the credit correlation modeling framework, a fairly new correlation approach is top–down modeling. Here the evolution of the portfolio intensity distribution is derived directly, i.e. abstracting from the default intensities of individual entities. Top-down models are typically applied in practice if:
In medical ultrasound imaging, autocorrelation is used to visualize blood flow. In intertemporal portfolio choice, the presence or absence of autocorrelation in an asset's rate of return can affect the optimal portion of the portfolio to hold in that asset. In numerical relays, autocorrelation has been used to accurately measure power system ...
Correlation parity" is an extension of risk parity, and is the solution whereby each asset in a portfolio has an equal correlation with the portfolio, and is therefore the "most diversified portfolio". Risk parity is the special case of correlation parity when all pair-wise correlations are equal. [9]
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning ...
Portfolio optimization is the process of selecting an optimal portfolio (asset distribution), out of a set of considered portfolios, according to some objective.The objective typically maximizes factors such as expected return, and minimizes costs like financial risk, resulting in a multi-objective optimization problem.
Resampled efficient frontier is a technique in investment portfolio construction under modern portfolio theory to use a set of portfolios and then average them to create an effective portfolio. This will not necessarily be the optimal portfolio, but a portfolio that is more balanced between risk and the rate of return.