Measuring Correlation-Adjusted Risk Across Open Positions
Summary
The article explains how correlations among open positions change total portfolio risk. It distinguishes instrument-specific risk, which diversification can reduce, from shared systematic exposure, which remains when positions respond to the same market drivers. Pearson correlation summarizes the direction and strength of co-movement, while a portfolio variance formula combines each position’s standalone volatility with pairwise interaction terms. For larger books, the same calculation uses a covariance matrix across all positions.
The proposed MetaTrader 5 tools estimate this risk from aligned historical returns and nominal exposure weights. A script reports risk assuming independence alongside correlation-adjusted risk and position contributions; a background service monitors the account and can notify the trader when a threshold is crossed. The examples show that changing correlation alone can materially alter combined risk for equally sized positions. The implementation is described as a measurement aid, using a limited history and a simplified exposure model. Historical correlations can change, and the article does not present this monitor as a complete risk system or evidence that any particular portfolio is safe.
Key ideas
- Portfolio risk depends on pairwise correlations as well as each position’s individual volatility and size.
- Positive correlation can increase combined exposure, while negative correlation can reduce it.
- A covariance matrix extends the two-position variance calculation to a multi-position portfolio.
- The described monitor compares independence-based risk with risk estimated from historical returns.
- Historical correlation estimates and nominal exposure weights are simplifications rather than a complete risk model.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.