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Average Cross-Correlations

by Vangelis M., 2423 days ago
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Example: a=AvgCorrelation("SPY,TLT,EEM",100) ;

This function computes the average cross- correlations of the assets in the list. It sums up the correlations of all possible pairs and divides by the number of pairs.
It can help to visualize how correlated more than 2 assets are. Or it can be used in a system to check the correlation of a stock to be bought against the average correlations of existing open positions.
An example of the internal calculation is:

AvgCorrelation("SPY,TLT,EEM",100) =
( Correlation of SPY-TLT +Correlation of SPY-EEM+ Correlation of TLT-EEM )/3.

Note: Don't use an excessive number of assets as the calculation grows exponentially every time you add one.


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