Welcome to my online repository of research and insights on automated trading system development
Just a quick post to let you know that the blog will go into “hibernation mode” for roughly a month, as I am going travelling to very remote places for the next 4-5 weeks, most of which will be without internet access or even electricity… It will be an interesting “jump” into a “disconnected” world, which should hopefully bring me back refreshed and full of new ideas.
There will be no new posts and I will not be replying to emails or approving new comments. The State of Trend Following and Trend Following Wizards report for May will be delayed to the end of June – apologies for the inconvenience.
Correlation Thoughts
It is often said that “Diversification is the only free lunch on Wall Street”.
Adding a new instrument or system usually improves a portfolio’s risk/reward profile, thanks to the non-correlation of the new addition – with the improvement usually increasing when the correlation decreases.
I’ll leave you with this “Summer puzzle“:
Is it possible to add a strongly anti-correlated instrument to a portfolio, without improving either return or risk of the portfolio? If yes, how?
Note that to make this puzzle less obvious the new instrument should have positive average return and volatility/standard deviation both similar to that of the portfolio (with risk being defined as Max Drawdown, and strongly anti-correlated with Pearson coefficient < -0.8).
Most readers will probably find the key to that puzzle fairly easily, but I still find it worth to ponder the answer, and the impact it can have on how to use correlation in system development. Without thinking about it, it seems fairly counter-intuitive.
As an extra, deciding question, you can try and guess where I will be in the coming month...
Hint: the main clue is in the picture above + the fact that this is a circumambulated mountain (rather than climbed).
Feel free to send your submissions by email or comments. Nothing to win though...
Until the end of June.
Jez
Have fun! Sounds great to go off the grid for a while.
Second question is much easier to first :) Its Mount Kailash – Tibet.