Problem bank
Problem 287 of 333HardLinear AlgebraP287
Adding a second forecasting signal
You forecast next-day returns with a signal that has correlation 0.3 with . You may add a second signal and use any linear combination as the forecast.
(a) Suppose has correlation 0.2 with and is uncorrelated with . What is the highest correlation with you can reach?
(b) Now suppose has zero correlation with but correlation 0.5 with . Does adding help? If so, give the best combination and its correlation with .
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