managing risk of 90 stocks/bonds portfolio

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BARLI
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managing risk of 90 stocks/bonds portfolio

Post by BARLI » Thu Apr 03, 2008 8:42 am

Hi guys, lets say you've got 90 instruments to trade: 3 stocks of S&P index, 5 stocks of Russel 2000 index, 67 OTC stocks, 5 corporate bonds(rated BBB and worse) and 10 corporate bonds with the option to sell it for a stock(also rated BBB and worse). 3 stocks can take Short positions, the rest(stocks and bonds) are not eleigible for short positions, so they can be bought and held as longs only. The goal is to stay at 0 P/L, no loss and no win, but 0$. How would you adjust the portfolio according to the criteria?

sluggo
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Post by sluggo » Thu Apr 03, 2008 9:13 am

Simple: just look into the future. Get tomorrow's price quotes today, on all instruments in the portfolio, and rebalance the sizes so the gains and losses will be equal.

(This assumes the goal is to stay at 0$ P/L on a daily basis. If the goal is to stay at 0$ P/L on a weekly basis, you can either rebalance every day, as above, or else get next week's price quotes today and only rebalance once a week.)

BARLI
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Post by BARLI » Thu Apr 03, 2008 10:54 am

sluggo, I wasn't joking when posting this, the task is not to get a home run or lose big but stay afloat..

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Re: managing risk of 90 stocks/bonds portfolio

Post by Mathemagician » Thu Apr 03, 2008 12:24 pm

BARLI wrote:The goal is to stay at 0 P/L, no loss and no win, but 0$. How would you adjust the portfolio according to the criteria?
I would allocate 100% to cash.

jj

BARLI
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Post by BARLI » Thu Apr 03, 2008 12:48 pm

you can't, since you get payed to trade those stocks/bonds...

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Post by Mathemagician » Thu Apr 03, 2008 12:53 pm

BARLI wrote:you can't, since you get payed to trade those stocks/bonds...
Not for long if this is your goal.

jj

BARLI
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Post by BARLI » Thu Apr 03, 2008 1:16 pm

3 S&P500 stocks are being traded heavily, permitted exposure is 50k per stock a day.Russel 2000 are thinner, OTC are volatile with almsot no volume. BBB bonds are just as volatile as OTC stocks. When broad market is up 1% or down 1% some adjustments should be made to the portfolio, the puzzle is how to balance it in a way the account's value won't get hurt too much - if S&P 500 is up 1 % the account shouldn't fall to below - 0.2% or if S&P 500 is down 1% the account shouldn't fall below same amount: -0.2%
PS You're a market maker of those stocks/bonds so you HAVE to take trades

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Post by dctag » Fri Apr 04, 2008 1:24 am

The only real solution I can see is to hedge out your risk with options, or just hedge out your market risk by shorting X amount of the SPY or whatever bench mark is more appropriate.. If you cant do that and you cant short most of the stuff you listed it would sure be hard to be a market maker. Could you provide more detail as to why you want a 0 P/L?

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Post by BARLI » Fri Apr 04, 2008 3:32 am

from experience of making a market for OTC stocks I found that it's extremely hard to remain profitable, alsmost everyday there will be below 0$ result. One reasons is because most OTC stocks no one wants and most of them are not known to the public, so when some fund comes in and sells it you gotta buy it on the way down, and you never know when a certain OTC stock will hit the bottom. Another thing is with BBB bonds where quantities of trading are much bigger cos its a corporate bond, the ones that have option to sell it for a stock require less quantity but these ones are directly connect to the underlying asset (i.e. the stock), so if the stock goes down 3-4% this bond will also tumble. Sometime you can take bets in bio-pharm stocks or real estate stocks that are extremely volatile when some news concerning this stock comes out. It can be in your favor and it can be agaist your position. So the goal here is to mathematically position yourself the way you're not really hurt when there big moves up or down. When the broad market is not moving at all there's still might be some damage done because of some OTC stock's news like they got approved by FDA or some some hi tech OTC stock got new orders to sell their equipment. Another thing is that you cannot hedge with options/ETFs/futures. If there would be an option to do that I wouldn't ask a question of experienced money managers on this board ;-)

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