TL;DR: Here is where we are in the forum with medicine as an analogy (and where I was when I finished medical school). I.e.,before statins (cholesterol lowering agents became mainstream): “Hey, did you read that article that said cholesterol levels are correlated with heart disease?” There are still serious questions about this but progress can be found in most texts on the subject.
BTW, they may still be wrong about many things but they were definitely wrong about cholesterol then. Correlation not being causation was discussed a lot with cholesterol as well as with smoking causing cancer. It is always just a lot of handwaving and gesticulating early on. But my main point is you cannot become a doctor without text-level understanding of many subjects, I think. And rightly so.
@judgetrade You said: “Important in that regard is that you have a balanced ranking system that diversifies over a lot of factors, so your timing of what macro likes does not have to be perfect.”
I have a simple question: Isn’t this exactly what Korr123 is trying to accomplish on the portfolio level? I understand that Korr123 may also be wanting to balance his shorts but I think that would only emphasize that the purpose is to balance and “diversify over a lot of different factors.”
BTW, I really do not care what P123 does with this. I think I will end up staying with Portfolio Visualizer. If nothing else the discussions in the forum are going to slow adoption of many useful techniques in the near future.
But I do not really fully understand what Korr123 is doing and want to learn. I would like to understand how this is used and how effective it is at accomplishing its intended use.
Has Ricccardo studied this in any detail in school so we do not have to reinvent the wheel on this STARTING WITH THE USEFULNESS OF CORRELATIONS? Some of this has been fully discussed with much of this in the 5th or 6th edition of a text, I would guess.
I am pretty sure that if correlations are discussed in a text about Finance at all, the general usefulness of correlations is established (or discounted) in an earlier chapter. Real sure actually.
But getting back to Andreas’ quote, isn’t that exactly what Korr123 is trying to measure and accomplish at the portfolio level? For long only portfolios, wouldn’t it balance diversification over a lot of factors which you said is desirable? Or isn’t that the goal, at least, with the question of how effective it is at doing that a separate question that could be answered empirically?
Note, I have no interest at all in how one would use this to create short positions but others might have a legitimate interest in that.
The only other comment I would have is mainly about my own comments (but not exclusively my comments). Pork bellies, car prices or how good cars are–when loaded with factors–at avoiding tornadoes will only go so far. I think I will be looking at some text books and papers on the subject at some point. There is certainly a lot about beta in any serious text. I think what Korr123 is interested in implementing is talked about in the texts in detail also. I have read about it, I believe, but it is a more complex subject and my understanding was limited on the first read-through. This is not in my priority list now (did I say I don’t really care what P123 does with this but I would like to learn about the technique as long as people are posting something with some useful information) but I don’t mind learning about it in the forum now.
Marco presented a paper in this regard earlier: @Marco: Thank you for advancing the discussion a little better than I have been able to so far. Real research is much appreciated.
While this is a complex topic that I do not fully understand, I still have the simple question about whether this is trying to accomplish exactly what judgetrade says is important. Or not.
To be sure, the above should reiterate that I do not know enough to make a recommendation about where this should be on anyone’s priority list. I am only saying this discussion might not be the final word for me. I will probably ignore the discussions about correlation—although you should check out the great insights about pork bellies above
Jim