how to balance risk in a portfolio?

[TooOldForThis]

1/2 + 1/4 + 1/6 + 1/9 = 37/36, so the right ratios are
2% use 1/2 x 36/37 = 18/37 and its risk is 2% x 18/37 = 36%/37.
4% use 1/4 x 36/37 = 9/37 and its risk is 4% x 9/37 = 36%/37.
6% use 1/6 x 36/37 = 6/37 and its risk is 6% x 6/37 = 36%/37.
9% use 1/9 x 36/37 = 4/37 and its risk is 9% x 4/37 = 36%/37.

If you don't like the fractions, multiply everything by 37 and get:
Buy 18 of the 2% to give 36% risk
Buy 9 of the 4% to give 36% risk
Buy 6 of the 6% to give 36% risk
Buy 4 of the 9% to give 36% risk.

All the risks are the same.

 

[CaesarSupreme]

1/2 + 1/4 + 1/6 + 1/9 = 37/36, so the right ratios are
2% use 1/2 x 36/37 = 18/37 and its risk is 2% x 18/37 = 36%/37.
4% use 1/4 x 36/37 = 9/37 and its risk is 4% x 9/37 = 36%/37.
6% use 1/6 x 36/37 = 6/37 and its risk is 6% x 6/37 = 36%/37.
9% use 1/9 x 36/37 = 4/37 and its risk is 9% x 4/37 = 36%/37.

If you don't like the fractions, multiply everything by 37 and get:
Buy 18 of the 2% to give 36% risk
Buy 9 of the 4% to give 36% risk
Buy 6 of the 6% to give 36% risk
Buy 4 of the 9% to give 36% risk.

All the risks are the same.

Cool, I think this will work.. Thanks a lot.

to the poster earlier, I'm not struggling with the basics i needed information on the math alone. Im not looking for a debate, i trust my strategy and need no help in that category.

 

[CaesarSupreme]

1/2 + 1/4 + 1/6 + 1/9 = 37/36, so the right ratios are
2% use 1/2 x 36/37 = 18/37 and its risk is 2% x 18/37 = 36%/37.
4% use 1/4 x 36/37 = 9/37 and its risk is 4% x 9/37 = 36%/37.
6% use 1/6 x 36/37 = 6/37 and its risk is 6% x 6/37 = 36%/37.
9% use 1/9 x 36/37 = 4/37 and its risk is 9% x 4/37 = 36%/37.

If you don't like the fractions, multiply everything by 37 and get:
Buy 18 of the 2% to give 36% risk
Buy 9 of the 4% to give 36% risk
Buy 6 of the 6% to give 36% risk
Buy 4 of the 9% to give 36% risk.

All the risks are the same.

I found an issue with the above but I figured out how to get my end result.

For those who are interested here is how it works. The above does give you the correct method for balancing the risks but they are left in terms of the risk itself. if you notice the above final percentages don't equal 100 as they should in a portfolio. 18,9,6.4 equal 37 not 100 which we are looking for. to remedy this we multiply those percentages by 100 and then divide that by the original 37 to arrive at the amount each risk should represent in a portfolio.

2% would become 48.6%
4% would become 24.3%
6% would become 16.2%
9% would become 10.8%

total = 100%

thats how much of each risk asset the portfolio would need to be comprised of.

thanks to "TooOldForThis" for the help....

 

[xandman]

Oops. The formula I gave would be to maximize a returns-based weighting. So for a minimization problem, you use the inverse. Brilliant. Thanks, TooOldforThis.

 

[shamimfx]

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....

in my opinion if u want to balance then mark all the risk in one 8%

 

[Murray Ruggiero]

Your missing a big problem. You can't do this with split adjusted data. On a portfolio you are forced to trade the same dollar value for all stocks if you are using split adjusted data or your results are just wrong. TradersStudio Stock analysis fixes these issues.

Please see my thread on ET
I am covering this topic here.

You can also get a free demo of TradersStudio at TradersStudio.com and use it to test out these ideas. I comes with stock sample data which is set up to use my TradersStudio Stock analysis.