How much am I truly risking if two of my open positions are correlated instead of independent?

How this is calculated

• Formula: effective combined risk equals the square root of (risk A squared plus risk B squared plus two times correlation times risk A times risk B). This is the standard way to combine two risk amounts that are not fully independent.
• A correlation of 1 means the two positions move together and effective risk equals the simple sum. A correlation of 0 means they move independently and effective risk is lower than the simple sum. A negative correlation means one position tends to offset the other.
• Correlation between two of your own positions is an estimate, not a guarantee. Two stocks in the same sector, or a stock and an option on that stock, often move together even when they do not look identical on the surface.
• Most simple portfolio heat calculations assume independent risks by default. Use this calculator first for any two positions you suspect are correlated, then use the effective combined number instead of the simple sum when you total your open risk.