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  1. #1
    Amoxicillin500mgNeacy Guest

    Default Risk Management: The 2% or 1% Rule

    I am interested in how you limit your exposure by sector. I have been doing some work on this myself.

  2. #2
    Andrewlax Guest


    I have a very simple rule as part of one of my strategies. No more than 40%, of my total number of stocks in that portfolio at any time, can be in the same sector. Not a
    whole lot of rocket science behind it I'm afraid, but it is just an attempt to put a little bit of conservatism in an otherwise medium risk type strategy.
    I currently have 17 stocks in this portfolio of which 6 are in Materials and another 6 in Industrials. If a further stock in either of these sectors came up for
    selection I would sell down one that was lower in my selection hierarchy, before I add the new selection.
    Regards, M

  3. #3
    AndreyBew Guest


    Thomas Dorsey in Point & Figure Charting gives an example of the risks affecting a typical stock:
    Market risk 66%
    Sector risk 24%
    Stock risk 10%

    Now these risks vary from stock to stock, but I carry this around as a rule of thumb:
    Market risk 50%
    Sector risk 25%
    Stock risk 25%

    In other words it is more important to get your market and sector timing right, than your actual stock timing. If you had to limit your capital at risk to 1% (some traders use 2%) in an individual stock, then it may be advisable to limit your sector risk to no more than 2 or 3 times that, at any one time.

  4. #4
    AndreaDox Guest


    I have only used "Market risk" to determine the amount of capital that I allocate to this strategy (currently my
    assessment of the risk in the market has resulted in me allocating 25% of my total trading capital to this portfolio).

    I then assess the current risk in each sector as Low, Medium or High. I use this to determine how much to risk
    for each individual trade. (a LR = 1% of portfolio trading capital risked on entry & HR = 0.4%)

    At the same time applying the rule that there can be no more than 40% of the total portfolio stocks in any one sector.

  5. Default

    Most risk management strategies are based on the assumption that stock returns are normally distributed (in a bell-curve around a mean). One of the key requirements for a normal distribution is that individual outcomes are random and independent of each other. We know that this assumption is false for the stock market as probably the biggest threat to our portfolios is co-variance: the tendency of stocks, sectors and markets to all move in the same direction at the same time. Individual outcomes are not independent.

    I have been working on strategies to address co-variance for several years and would appreciate the views (and risk management strategies) of other readers.



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