how do we handle stop-loss in mean-variance portfolio?

[mizhael]

lets say a stock dropped more than 20%, and I would stop out...
does MV portfolio handle that?

 

[Steven.Davis]

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.

 

[Steven.Davis]

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

 

[intradaybill]

Quote from mizhael:

lets say a stock dropped more than 20%, and I would stop out...
does MV portfolio handle that?

Re-allocate