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Given that a portfolio consists of Stock=USD 30, High-yield bonds(duration=5 years,spread duration=5 years) =USD 40 , Commodity = USD 30.

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Taking the correlation between the bond yield and the stock may miss some information, such as duration, rolldown.

For calculating the returns of a Fixed income product over a period of time = PROD(1+r)-1

where r is the single period return

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  • $\begingroup$ Hi, I have only the data, BarCap US Corporate HY YTW - 10-Yr Treasury Spread for each month over the last 30 years. The portfolio has 5-year duration HY bond. May I ask what is the best way to calculate the correlation between this HY bond and equities (commodities respectively)? For equities and commodities, data are also monthly basis. $\endgroup$ – WantToLearnNewSkills Apr 16 at 17:31
  • $\begingroup$ This index is tracking an ETF, which means that its Price is some weighted average of ETF Prices dealing with HY bonds. Therefore, you can consider its raw Returns like you do with equity and commodities. $\endgroup$ – VitoC Apr 17 at 7:32
  • $\begingroup$ I am abit confused on the explanation of CSI BARC Index. (Have attached new picture). Is this the bond yield or the treasury spread(meaning after minus treasury yield)? $\endgroup$ – WantToLearnNewSkills Apr 17 at 14:43
  • $\begingroup$ Also, some data are: 30/6/2018= 3.63, 31/5/2018=3.55, 30/4/2018=3.31, which obviously is not price. Thus to find correlation with equities/commodities, I must take inverse? or any alternative way? $\endgroup$ – WantToLearnNewSkills Apr 17 at 14:50
  • $\begingroup$ It seems to be a yield, the 10Y yield. So you can price the index. To do it, just consider the whole index as a bond with no coupons and 10Y maturity (use the spread as yield). Then use the price for the correlations. $\endgroup$ – VitoC Apr 17 at 17:10
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You actually don't need to worry about correlations. Just calculate the portfolio value over time using your fixed weights [.3, .4, .3].

The advantage of this approach is;

  1. You don't have to worry about correlations.
  2. You can use any volatility method you want (rolling window, GARCH, etc).
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