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If I have 3 different currency trades (ex short EURSEK, short NZDUSD, long USDJPY), how do I size each trade if I wish to allocate risk equally in order to target a 12% portfolio volatility (allowing for leverage and short selling)?

Any guidance would be greatly appreciated, along with R or python code examples.

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First, for each of the 3 currencies taken separately, find out the leverage lambda_i (i=1,2,3) that would be required to produce an annual standard deviation of 12%. [In my experience the std dev of currencies is about 8 or 10%, so the three lambdas will be small, like 1.25 or 1.2].

Then find out what is the volatility that results when the three 12% vol currency positions are combined equally into a portfolio. Because of diversification it will not be quite 12%, so adjust the three lambdas proportionately to bring it to the desired 12%.

I visualize this as a spreadsheet with separate columns for the historical returns of the different currencies, plus another column for the portfolio; but then I am an Exhell addict ;)

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