portfolio management

Discussions about Money Management and Risk Control.
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portfolio management

Post by smodato » Tue Jul 20, 2004 3:26 pm

Hi, I just read this chapter in Jones's book and, while the development of the theory seemed quite nice, I got puzzled by the fast explanation about the practical mangement of contracts trading different futures.
All I found is a summary table with the astonishing data but I fear being astonished in a different way trading it for real so i prefer to go deeper into the subject.
If for example you are trading simultaneously (but with two different strategies) both S&P and Nasdaq would you better apply separate money management to each equity or would you consider the resulting equity and from that decide the different bet sizes? In case the answer is for separate management no problem but what if you consider the two together? I could calculate how many S&P and how many Nasdaq depending on my approach buy should I average them in case of simultaneous trade? I believe not but your opinion is appreciated.
To better explain: if I calculate to trade with 4 S&P or 6 Nasdaq what if I get a long signal on both markets? Should I still buy 4 S&P and 6 Nd or should I go with 2 and 3 (50% each)?
Thanks for your help.

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Post by blueberrycake » Tue Jul 20, 2004 3:34 pm

Figure out the correlation between your two strategies, and then you can figure out the proper size allocation. Of course all stock indexes are highly correlated during extreme moves, so if your systems tell you to go long in both at the same time, I would reduce the amount allocated. As to how much you want to reduce the amount, that obviously depends on the maximum level of risk that you want to take on. When this moves from being a theoretical to a practical question, Monte Carlo simulations will be a useful tool for figuring out the actual numbers.


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Post by jankiraly » Tue Jul 20, 2004 4:37 pm

You could get software like Veritrader or Wealth-Lab or Trading Recipes, and install deliberate risk limits. In Veritrader it's "Max Correlated Units", in Trading Recipes it's "GROUPRISK, LONGRISK, TOTALRISK, ITEMPOSITION", and in Wealth-Lab it's theoretically possible but you will have to code everything yourself including doing your own across-the-portfolio bookkeeping.

You can say "I'll take a risk of X amount (X might be a percentage) on one position, but if I get another trade in the stock index market group, in the same direction as the first, then I'll only risk 1/3 of X on the second signal". Or whatever risk limiting rule you decide. Invent it, write it in trading code, and test it out. Cool.

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