Suppose you are trading two mean-reverting assets, A and B, and that $Covar(A, B) > 0$. You are currently long one unit of A, and are considering buying one unit of B. Compared to the situation where you have no position, should you be...
(A) More eager to buy B, because it adds some diversification.
That is: $\sigma_{A+B} - \sigma_B < \sigma_A$
(B) Less eager to buy B, because you already have correlated exposure to A.
That is: $ \sigma_{A+B}^2 - \sigma_B^2 > \sigma_A^2$
(C) Something else?
If (B), then why do people use $2\sigma$ as a rule of thumb for entering a spread rather than $X \sigma^2$ ?