Advanced talks on correlation Commander in Pips: I know that you like statistics. You are a fan of the volatility calculation and now correlation calculation also, right? Pipruit: Sir, when you start like that it makes me nervous. Commander in Pips: Ok, then I'll start directly from the point. There is some theory that exists by the name of its creator, but usually it is applied to the stock market. It is called Markowitz theory. I will not dive in yp the wide details and will just tell you the core. If you are interested in it – you will find a lot material about it on the net. The major idea is that risk of investment is with return on of investment – the higher the risk the higher the return. Risk treated as volatility of some assets. And theory tells us that there is a possible way to create an investment portfolio from N different assets that will give you optimal relationship between risk and return – a so called “efficient portfolio.” All others combinations of these assets will give either less return with the same risk or higher risk with the same return. We can try to adopt this theory for forex market. Pipruit: Well, I better visit you sometime next year. Commander in Pips: Hold on, this is not as difficult as you can imagine. We will use a simplified example just for two currency pairs, and calculate the ratio of lot size that will give us the maximum return with predefined risk. Here is our task: 1. Find the pair with maximum carry; 2. Find another pair with small correlation and minimum carry. 3. Combine them so, to get better risk/reward ratio.