The Correlation section within the Portfolio Builder settings allows users to manage and control the relationships between different reports included in the portfolios. By setting correlation restrictions, users can ensure that the portfolios are diversified and not overly dependent on highly correlated reports.
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Correlation
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Maximum Possible Correlation of Reports in Portfolio
Description: This parameter sets a restriction on the maximum allowable correlation coefficient between reports in a portfolio. The correlation coefficient measures the degree to which two reports move in relation to each other, with values ranging from -1 to 1.
- Purpose: Limiting the correlation between reports helps in creating diversified portfolios where the performance of one report does not heavily influence the others. This reduces the risk associated with highly correlated strategies and enhances overall portfolio stability.
- Use Case: Set this restriction to avoid including highly correlated reports in the same portfolio, promoting diversification and reducing risk.
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Correlation Period
Description: This setting defines the time period over which the correlation calculations are performed. Different time periods can provide different insights into how reports correlate over short-term or long-term intervals.
- Options: Minute, Hour, Day, Week, Month.
- Purpose: Choosing the appropriate time period for correlation calculations helps in understanding the relationships between reports over the desired timeframe. Shorter periods may capture more volatile, short-term relationships, while longer periods can provide insights into more stable, long-term correlations.
- Use Case: Select the time period that aligns with your investment horizon and analysis needs. For instance, use daily or weekly periods for long-term strategies and minute or hourly periods for high-frequency trading strategies.
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Correlation Variable
Description: This setting specifies the variable values used for calculating correlation between reports. Different variables can highlight different aspects of the relationships between reports.
- Options: Net P/L, Maximum Drawdown, Number of Opened Positions, Number of Closed Trades.
- Purpose: By selecting the appropriate correlation variable, users can focus on the specific aspect of performance or risk that is most relevant to their portfolio construction goals. For example, using Net P/L as the correlation variable focuses on the profitability relationship between reports, while Maximum Drawdown emphasizes the risk relationship.
- Use Case: Choose the correlation variable that best reflects your primary concern in portfolio construction, whether it be profitability, risk, or trading activity.
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Summary
The Correlation section in the Portfolio Builder settings is essential for managing the relationships between different reports in a portfolio. By setting maximum allowable correlations, defining the correlation period, and selecting the appropriate correlation variable, users can ensure that their portfolios are well-diversified and aligned with their specific risk and performance objectives. This section helps in constructing robust portfolios that are less susceptible to the risks associated with highly correlated strategies.