Ralph Vince - Portfolio Mathematics

ch01 JWBK035-Vince February 22, 2007 21 : 43 Char Count= 0

The Random Process and Gambling Theory 33

FIGURE 1.5 Perfect positive correlation (r=+1.00)

of the variables;for example,X=((X 1 +X 2 +...Xn)/n.)

r=

∑

a(Xa−X)∗

∑

√ a(Ya−Y)

∑

a(Xa−X)

(^2) ∗

√∑

a(Ya−Y)

2

(1.05)

Hereis how to perform the calculation as shownin the table on page34:

1.Average the Xs and the Ys.

2.For each period, find the difference between each X and the averageX

and each Y and the averageY.

FIGURE 1.6 Perfect negative correlation (r=−1.00)