Weak Correlations of Stocks Future Returns

TL;DR

This paper investigates stock return correlations using common explanatory variables and introduces an adaptive quantitative method for portfolio construction that outperforms traditional approaches in risk and recovery.

Contribution

It presents a novel adaptive portfolio strategy based on correlation analysis that achieves better risk-adjusted returns than standard methods.

Findings

Portfolio exhibits lower drawdowns

Higher recovery rates compared to benchmarks

Correlation analysis informs better asset selection

Abstract

We analyze correlations among stock returns via a series of widely adopted parameters which we refer to as explanatory variables. We subsequently exploit the results to propose a long only quantitative adaptive technique to construct a profitable portfolio of assets which exhibits minor drawdowns and higher recoveries than both an equally weighted and an efficient frontier portfolio.