# Tag Info

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: $$\frac{\sigma(w^TX,v^TX)}{\sqrt{(w^T\Sigma w)(v^T\Sigma ... 1 One standard approach is to shrink your forecasts towards zero (or to some reasonable value as in the Black-Littermann model). Shrinking towards zero is done by:$$w^*=\underset{w}{\text{argmax}} \ \ \lambda_{\alpha} r^Tw - \lambda_r w^{T} \Sigma w - tradingCost(|w-w_0|)\\0\leq\lambda_{\alpha}\leq1 Shrinkage coefficient $\lambda_{\alpha}$ is best ...