Imagine a portfolio with 4 stocks. One with 9% risk another with 4% risk one with 6% risk and another with 2% risk. How would you weight each stock in order to balance a portfolio like this? Im really looking for the method or formula to balance this portfolio not the actual balance. solving the example would be also help to show how you did it. thanks in advance. I can't figure out how to do this for the life of me... hopefully its a basic question....
An elementary risk weighting scheme would to add the risk percentages and divide each risk with the total. 9+4+6+2=21 9/21= %weight for stock1 4/21= %weight for stock2 and so on. The problem is "what" is risk and how reliable are the measures. Did you actually lower portfolio by splitting your holdings? Some days I just want to buy a balanced stock/bond index fund and close my eyes for the next 30 years. Unfortunately, this isn't the 80s
But thats not what I'm looking for. I need the risk percentages to balance in the end. the 2% risk stock would need to be a lot larger share of the portfolio to equal the risk of the 9% stock. as far as the value of risk measures , i get it but i really want to know how to do this...
using standard deviation and past data or simple answer software. I really don't want to get into a big convo about the ills of risk analysis. Lets just take the risk percentages as they are. how would you balance them in a portfolio.
I measure my risk differently. I consider my risk to be the amount I could lose if the trade hit my stop loss point. I balance my risk by only risking less than 1% of my capital on any one trade.
Deaddog is talking about linear type risk on a single issue. You are worried about a matrix type risk and the best measure is correlation. Applying both risk analysis is sound practice, but not correlation/portfolio management practical for a very active trader. You just get a natural awareness of issues that zig and zag together during the trading day and reduce/avoid exposure accordingly.
Yea, Is there any knowledge on how to balance risk within a portfolio or is this forum dedicated more towards the active trader?
The concepts are interelated. If you want a more basic grounding thats investor related, you can check the morningstar forum. However, you really need to brush up on the basics to save yourself time. I recommend a book called " A Random Walk Down Wall Street" by Burton Malkiel or Investopedia (com).