Hey guys!!
Ive got a question, I hope some of you could help me out with.
Suppose you have found the optimal portfolio, which consists of two assets. You have the weights of the each of the assets.
And two investors come along with differing risk aversion levels, so they choose different complete portfolios on the CAL.
What is the correlation between the two differing investors portfolios?
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I would probably compute the correlation on the returns of the two portfolios
But you cant corelate the returns if you only have the weights of the porffolios, E(r) and standard deviations...
How did you compute the STDEV? By using each stock return? (ie. sqrt( wi^2 * stdev i^2 + wj^2 * stdev j^2 + 2 * wi wj * stdev i stdev j *correl ij ))
If so you can just use the weights and compute a pro-forma portfolio return
Yep, I used that forumula, then i have the new E(r) and standard deviations for each of the 2 investors portfolios. But how do you get the corelation between the two portfolios now?
So just do wi * ri + wj * rj (where r is the return) for your full data set, that should give you the set of historical pro-forma returns for your portfolios and then just do correl on the stream of pro-forma returns for the two portfolios
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