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Q.4872 In December 2020, a set of data is given such that the Dow correlation matrices have an averaged correlation of 0.1925 with a long-term mean of 0.2723. Compute the expected correlation for January 2021 if the average mean reversion is 0.6715. | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

Using the mean-reverting equation: $S_t = a(\mu_s - S_{t-1}) + S_{t-1}$

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

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

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Q.4872 In December 2020, a set of data is given such that the Dow correlation matrices have an averaged correlation of 0.1925 with a long-term mean of 0.2723. Compute the expected correlation for January 2021 if the average mean reversion is 0.6715.

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