To compute the expected correlation for the next period, we can use the mean reversion equation:

$S_t - S_{t-1} = a(\mu_s - S_{t-1})$

Rearranging to solve for the expected correlation ($S_t$): $S_t = a(\mu_s - S_{t-1}) + S_{t-1}$

Where:

• $a = 0.6715$ (average mean reversion)
• $\mu_s = 0.2723$ (long-term mean)
• $S_{t-1} = 0.1925$ (current average correlation)

Therefore, $S_t = 0.6715(0.2723 - 0.1925) + 0.1925$ $S_t = 0.6715(0.0798) + 0.1925$ $S_t = 0.0535857 + 0.1925 = 0.2460857 \approx 24.61\%$