Problem:
Three stocks have pairwise correlations that are all the same, ρ. What is the range of ρ?
Solution:
Let X=(X1,X2,X3) be the vector of stock returns in question. Let,
with
Treating Y as column vector, Finally, let,
This is a classic problem that uses principles from portfolio construction. Book your first session now to master this topic and more to prepare for your Quant Finance interviews!
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