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to answer my own question, there's no popular model for the question, that $dS/S=\mu(t)dt+\sigma(t)dW$, and $\sigma(t)$ is correlated with $\mu(t)$. the general framework should be stochastic volatility model, but need do the extension on my own.


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Correlations between what? Correlations between stock A and another stock B - relative value arbitrage - not sure if small correlations will help here. Correlations between stock A and its future stock return Ra - its called Information Coefficient. Try Fundamental Law of Active Management and many similar web info on Fundamental Law for more information. ...


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it is based on Kelly criterion. mentioned in one of stackexchange posts here .


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Here it is: "Rebonato, R., Jackel, P. The most general methodology to create a valid correlation matrix for risk management and option pricing purposes." Recall: a covariance matrix will be the same as a correlation matrix if scale is removed. I used this method for ensuring positive definite correlations matrices.


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This is a very good question. In part, you can find a comparison by going to randommatrixportfolios.com and looking at the wealth charts for e.g. the Dow 30 portfolios, say, the 2-year data. You will note that portfolios based regressing the log-returns of price on the "signal" PCs (principal components) based on the Marcenko-Pastur noise cutoff and using ...



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