Discussion in 'Strategy Development' started by mizhael, Feb 11, 2011.
lets say a stock dropped more than 20%, and I would stop out...
does MV portfolio handle that?
The question is the Value At Risk in each time horizon and the likelihood that a correlation breakdown will push this still higher.
If you know where your stop is, then barring scenarios of limit-up/limit-down, I would think it reasonable to cap the position Value At Risk as the OTM loss plus the slippage from a robust execution model.
I haven't seen this written about.
I thought about it some more, and no, capping the position Value-At-Risk isn't going to be reflected in the correlation matrix and not in the portfolio Value-At-Risk. To deal with contingent orders, one needs to model the portfolio and use stochastic integration methods (Monte Carlo).
For example, http://www.riskglossary.com/link/monte_carlo_transformation.htm
Separate names with a comma.