@vince.quant: How can a losing strategy make you more money? Take a strategy earning 10% a year above cash with 10% volatility (Sharpe 1), and a second one losing 3% a year with the same volatility and a correlation of −0.8 to the first. A 60/40 mix earns 4.8% (a plain weighted average) with 3.7% volatility, since the correlation term in Markowitz's portfolio variance is negative. That's a Sharpe of 1.30, and levered 2.7× back to 10% volatility, it earns 13%. The test follows from the same math: adding a small weight of a new strategy raises your Sharpe ratio when Sharpe_new > ρ × Sharpe_yours. When ρ is negative, that threshold drops below zero. It also cuts the other way: a strategy with a Sharpe of 0.5 and a correlation of +0.8 to yours fails it. Limits: the numbers are an illustrative example and the daily bars are simulated. Real correlations and Sharpe ratios drift over time, and leverage assumes you borrow at the cash rate. Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 7(1), 77–91. doi.org/10.1111/j.1540-6261.1952.tb01525.x #finance #quant #trading #algotrading #stocks

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Thursday 01 October 2026 19:50:10 GMT