How many positions is too much?
Suppose I have a portfolio consisting of N amount of positions each with R% risk and risk/reward=k. Suppose that positions are independent from each other cov(pos1, pos2)=0. Find relationship between amount of positions N to profit, and overall risk to portfolio.
Motivation behind the question:
I could open 10 positions (different instruments) with 2% risk of each, so that in the worst case scenario it yields -20% to my account. I feel that those positions are loosely correlated* and thus it is very unlikely to being stopped out on all positions. Such practice increased my overall profit, however I do not quite understand “the math” behind it and the risk I take.
* also a new important question arises: on which time frames positions or under what circumstances positions will not be correlated. I feel that the shorter the timeframe the less correlation.
I think this question requires more precise formulation, please share your thoughts below. Your answers would be highly appreciated.
Motivation behind the question:
I could open 10 positions (different instruments) with 2% risk of each, so that in the worst case scenario it yields -20% to my account. I feel that those positions are loosely correlated* and thus it is very unlikely to being stopped out on all positions. Such practice increased my overall profit, however I do not quite understand “the math” behind it and the risk I take.
* also a new important question arises: on which time frames positions or under what circumstances positions will not be correlated. I feel that the shorter the timeframe the less correlation.
I think this question requires more precise formulation, please share your thoughts below. Your answers would be highly appreciated.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.