User blog comment:Lauren Darkmore/The RWBY AMA on Monty's twitter/@comment-10390252-20131111000031/@comment-10390252-20131111092546

My personal theory at the moment is that they're half-sisters; same father, different mothers. However, as Zolnir points out, this doesn't mesh with everything Monty has said.

Crackpot Theory:

Summer Rose, the Chosen One, went bad, becoming Cinder and leaving behind her husband and daughter (Yang). As a counter, Ozpin had a clone of Summer made from some genetic material they had stored somewhere. The result was a girl they named Ruby who they've been secretly raising to be used as a weapon against her "twin" and to be their replacement Chosen One.