Let's assume that the relationship between two assets is deep and abiding so that ...
>I suppose you also believe in the tooth fairy.
Pay attention. This is entertainment.
>It's Science Fiction.
Often, when one wants to decide upon how we allocate our portfolio funds to these two assets,
(like maybe 60% of this and 40% of that), we go through some Risk/Reward ritual like ...
>Efficient Frontier?
Yeah, could be. But often (too often?) one associates Risk with Standard Deviation of returns and reward as the Expected Mean return.
Though Standard Deviation is a reasonable measure of Volatility, I think there are other, better measures of Risk, like ...
>Drawdown?
You took the words right outta my mouth.
Okay, so here's a ...
>Anything wrong with Expected (mean) return as reward?
If you'd like an estimate of what return you're likely to get for the coming month (that is, some "expected" return),
you'd probably calculate the Mean return over the past umpteen months.
However, if you'd like to calculate your return over the next 12 months, that Mean return ain't much good.
In fact, if M is the Mean return (from historical data) and you calculate (1+M)^{12} to see how each $1 would evolve,
you'd get an estimate too large.
In fact, you're better off calculating an Annualized Return (or Compound Annual Growth Rate) which involves not only the Mean return but also the Covariance of monthly returns so that ...
>Cowho?
It's not important for what I want to talk about, but you can take a peek here.
Okay, so here's a ...
>Spreadsheet?
Stop interrupting!
Yes, a spreadsheet ... and it looks like this:
 You type in a couple of Yahoo stock symbols and click a button to Download ten years worth of monthly prices.
(Example: GE and MSFT)
 Then you click another Plot button and you see the consequence of allocating different percentages to each stock, for an initial $1K portfolio.
(Example: Drawdown = $1146 and up)
 Then you get to see the "best" allocation which would have reduced your Drawdown "risk" to a minimum.
(75% GE + 25% MSFT)
>And that's useful?
I thought I said entertaining.
