I started reading Portfolio Analysis (Volume4) last night. I understand how correlations of individual assets affect total portfolio risk . Here’s the question: Could somebody apply the same theory to trading systems that don’t look at correlations of assets as they enter according to technical triggers. I have been trading a trend-following system with ok results in the last 2 years. backtesting suggests that my expected return is 10% pa and the standard deviation is 20% pa. I obviously have some diversification anyway as I’m trading indices and commodities often at the same time but now I wonder if I could improve trading results if I started trading another system that would have to have a low correlation to my existing system…but how would you determine the correlation between the 2 systems if you have got all the trade history from backtesting? Dirk
Keep reading and you will learn how to do the calcs. In the real world, correlations aren’t stable and often go to near 1 in a crisis.