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Old 05-14-2020, 04:57 PM   #1
rivercitybirdie
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a CAPM (probability) question

feel a bit stupid asking this.... i can work it out long-form but it's messy. hoping there's an easy math way to look at this.

i have two stocks that make up the entire stock market (or at least an entire 2 stock portfolio)

i have the stdev's, weights and correlation between the two stocks.. so i can come up with portfolio stdev.

but what is the correlation between each of the two stocks and the portfolio? surprisingly i have never seen this calculation in many web pages i check.

another related question: say i have apple stock and the S&P 500... and i know apple/S&P 500 stdevs and correlation..... how does stdev change as i add more and more AAPL to a portfolio that started at 100% S&P 500

thanks in advance....... i had these question ideas before but my term impetus is reading Aaron Brown's Risk book. Aaron is one of the top risk managers in the world (not the CNN, KOMO Seattle guy), a major poker player and used to post here sometimes.
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Old 05-14-2020, 04:58 PM   #2
rivercitybirdie
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Re: a CAPM (probability) question

i came up with some answers myself, but it was quite confusing and not sure i was correct. the answer was deterministic anyway, which made no sense to me.
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Old 05-14-2020, 08:07 PM   #3
BrianTheMick2
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Re: a CAPM (probability) question

Deterministic?!?

You would normally calculate the correlation between the two using what the experts call "data." Excel would work fine. The interesting thing is to calculate the correlation on rolling one day, one week, one month, annual bases. Or you could cheat and use
https://www.portfoliovisualizer.com/asset-correlations

Cheating is smart. Remembering that correlations are not necessarily stable isn't cheating, but is smart. I don't think the linky thing above is total return, btw.

Also, something something something about geometric vs arithmetic returns being important.

Edit: didn't really answer your question
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Old 05-17-2020, 03:36 PM   #4
rivercitybirdie
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Re: a CAPM (probability) question

Mick, thank you so much for the response.

i probably got too fancy and may have erred in saying "deterministic"

i just mean that if you have two assets A and B and were trying to answer my question. it seems like correlation A with the market (market is simply A and B shares at known weightings) is a function of correlation B with the market which makes no sense when all the pertinent info is known.

thanks for the tip on portfoliovisualizer.com.. use it all the time and love it, but hadn't thought of that.

i think i'm looking for short cuts (simple rule of thumb calculation, not long-form which i can probably figure out on my own)
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Old 05-17-2020, 05:58 PM   #5
BrianTheMick2
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Re: a CAPM (probability) question

Quote:
Originally Posted by rivercitybirdie View Post
Mick, thank you so much for the response.

i probably got too fancy and may have erred in saying "deterministic"

i just mean that if you have two assets A and B and were trying to answer my question. it seems like correlation A with the market (market is simply A and B shares at known weightings) is a function of correlation B with the market which makes no sense when all the pertinent info is known.
Why doesn't it make sense to you? You know the value of A and know the value of A(x)+B(1-x) (aka your market, with x denoting the weighting of A). It would be quite strange if you couldn't figure out everything you'd like to know about B with those values.

Quote:
i think i'm looking for short cuts (simple rule of thumb calculation, not long-form which i can probably figure out on my own)
Just use ms excel. Taking shortcuts is necessary if all you have is a slide rule or abacus.
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Old 05-27-2020, 08:41 AM   #6
jukofyork
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Re: a CAPM (probability) question

Quote:
Originally Posted by rivercitybirdie View Post
feel a bit stupid asking this.... i can work it out long-form but it's messy. hoping there's an easy math way to look at this.

i have two stocks that make up the entire stock market (or at least an entire 2 stock portfolio)

i have the stdev's, weights and correlation between the two stocks.. so i can come up with portfolio stdev.

but what is the correlation between each of the two stocks and the portfolio? surprisingly i have never seen this calculation in many web pages i check.

another related question: say i have apple stock and the S&P 500... and i know apple/S&P 500 stdevs and correlation..... how does stdev change as i add more and more AAPL to a portfolio that started at 100% S&P 500
https://quant.stackexchange.com/ques...ined-portfolio

Quote:
thanks in advance....... i had these question ideas before but my term impetus is reading Aaron Brown's Risk book. Aaron is one of the top risk managers in the world (not the CNN, KOMO Seattle guy), a major poker player and used to post here sometimes.
He still posts a lot on quora:

https://www.quora.com/profile/Aaron-Brown-165

Juk
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