As part of a mean variance portfolio task, I am calculating portfolio risk and optimal allocations between assets given required level of return. Input: expected returns, volatility and correlation matrix. So far so good.
As a second part, I am supposed to stress input correlation matrix by some multiplier (say 1.3) and see how to it impacts the allocations and portfolio risk.
The question I have is: can I just multiply all fields in the correlation matrix by the given multiplier? It seems wrong to me as I would end up with "self correlation" > 1 on the diagonal, which makes no sense? Should I just keep diagonal as 1s and only multiply the rest? What if the multiplier is such that correlation between i and j will be >1 anyway? Any ideas appreciated, thank you.
NOTE: No risk free asset in this scenario, but it shouldn't matter.