I am interested in how you limit your exposure by sector. I have been doing some work on this myself.
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I am interested in how you limit your exposure by sector. I have been doing some work on this myself.
Risk Management: The 2% (or 1%) Rule
I have only used "Market risk" to determine the amount of capital that I allocate to this strategy.
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.
