Portfolio Risk Management

In This Lesson

Advanced portfolio-level risk management techniques.

Duration: 30 min

Overview

Advanced portfolio-level risk management techniques. This lesson will provide you with practical knowledge and actionable insights you can apply to your trading immediately.

By the end of this lesson, you'll have a clear understanding of the concepts and be able to apply them in real trading scenarios. Let's dive into the details.

Key Concepts

Portfolio Beta Management

Managing overall portfolio sensitivity to market movements through position sizing and hedging.

Risk Budget Allocation

Systematically allocating risk capacity across strategies, timeframes, and asset classes.

Correlation-Adjusted Position Sizing

Reducing position sizes when adding correlated positions to maintain constant portfolio risk.

Maximum Adverse Excursion (MAE)

Tracking the worst drawdown of each position to understand true risk vs planned risk.

Portfolio Value at Risk (VaR)

Statistical measure of maximum expected loss over specific time period at given confidence level.

Practical Application

Now let's put this knowledge into practice. Follow these steps to apply what you've learned:

1. Calculate true portfolio risk considering correlations between all positions
2. Set maximum allocation limits: 30% per sector, 20% per stock, 40% per strategy
3. Track portfolio beta and adjust during different market regimes
4. Monitor risk budget utilization daily - never exceed 100% allocation
5. Implement portfolio hedging when risk exposure exceeds comfort zone
6. Review correlation matrix weekly and adjust position sizes accordingly

Common Mistakes to Avoid

Position Size Based on Individual Trade Risk

Sizing each position in isolation without considering total portfolio exposure and correlation effects.

Ignoring Sector/Geographic Concentration

Having multiple positions in related sectors (tech stocks, oil companies) thinking it's diversified.

No Portfolio Heat Map

Not visualizing total risk exposure across all positions and timeframes.

Key Takeaways

Portfolio risk often exceeds sum of individual position risks due to correlations
Diversification requires limiting concentration across multiple dimensions
Risk budgeting prevents emotional position sizing decisions
Portfolio hedging can reduce risk without eliminating profit potential
Regular correlation monitoring prevents hidden concentration risks

Your Next Steps

Ready to continue your learning journey? Here's what to do next:

• Review this lesson's key concepts
• Complete the practical exercises
• Take notes on what you've learned
• Practice with a demo account
• Move on to the next lesson when ready