Acrary is a genius!

you didn't think your average ET'er was a rational mean-variance optimizer now did you?

 

I would never do such a thing!
Seriously speaking, I thought that you would appreciate that I shared with you a finding that we spent a lot of time on. I will repeat very clearly. Correlation level of your portfolio does not change its risk/reward ratio. I welcome every other opinion and would be willing to discuss it (in a nice, intelligent manner) but for us this question has been clearly answered and tested with a high degree of reliability. You more than welcome to disagree and build your portfolios the way you like it. I just simply pointed out one of the rules that we use to form our trading portfolios.
Cheers,
MAESTRO

 

maestro, please reply to this (in whatever manner you
find appropriate):

"i have system A with a sharpe of 1. i have system B with
a sharpe of 1.

the lower the correlation, the higher the chance that the
portfolio AB has a sharpe above 1."


if you can point out my flaw i am more than willing to
learn from you.

 

correlation != covariance

 

whatever. take cointegration. the basic
claim
remain
the same.

 

Yes, your combine sharpe is above 1, but your profits are less per capital in use at the same time, so the overall risk/reward ratio is still the same.

 

my margin utilisation is around 10% for my intraday
trading. i highly doubt adding some leverage in order to
keep absolute returns at the same level will result in
capital costs exceeding the gain. i am trading futures
and leverage is pretty cheap in this field.

plus why should what you say have a different effect on
correlated strategies than on non-correlated ones?

 

You are right, it does not! As I said, correlation, no correlation makes no difference to your risk/reward ratio. Only individual strategies risk/reward ratio makes difference not their combination!

 

Maestro is there value in diversification or not? If yes could you explain how it helps? Thanks.

 

The only value of the diversification is to reduce the impact of fat tails. The distribution curve of a diversified portfolio is more uniform. Therefore the portfolio stress per unit of capital is less. That is all. It has nothing to do with risk/reward ratio. The more correlation you have the less efficient your hedge is against the fat tails. Some people add anti-correlated securities in hope of achieving the hedge. It is wrong. The best anti fat tail hedge is “0” correlated securities. If you talk about strategies, you cannot get hedged with their combination unless you have diversified portfolio. All the strategies in your portfolio will be superimposed and act independently.