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You have the risk factor $F$ and the asset that it is correlated to $r_m$. You can calculate the variances of each of these, say $\sigma^2_F$ and $\sigma^2_m$. If you do not care about the distribution but just work with variances and correlations then can look at an OLS setting: $$ F = \beta r_m + \epsilon $$ with $\beta = \rho \frac{\sigma_F}{\sigma_m}$ ...


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If I understand correctly what you are after is the marginal volatility contribution of a single asset to the portfolio. This is given by $$ \sigma(X_j;X) = \sigma(X_j)\ \rho(X_j, X) $$ See here for details.


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You will need the covariance matrix to calculate this. Say you have a collection of $n$ assets. The value of asset $i$ is represented by the random variable $X_i$ and the corresponding portfolio weight is are $w_i$, and $v_i$ for the two portfolios. The correlation between the two portfolios is: $$ \frac{\sigma(w^TX,v^TX)}{\sqrt{(w^T\Sigma w)(v^T\Sigma ...


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If I understand your problem correctly you are trying to search for the optimal basket of 5 pairs (without worrying about weighting). The problem is computationally there are too many combinations to sort through. So I will propose a simple algorithm: Calculate correlation matrix, grab the pair that has the least avg correlation as a seed for your basket, ...


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I think Cholesky on correlation matrix is better because it makes code apply more generally in case we don't have full rank. For example, suppose we want to simulate three correlated normals with covariance matrix [[a^2,0,0], [0,b^2,0], [0,0,c^2]] i.e. variables are uncorrelated and have vols a, b, and c. Because this is positive definite, we can do ...



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