When to diversify winners?

sef88 said:
Let's say if you got 2 positions (pink and green) - the possible issue is you may not know which will go up or down at any point of time. When you merge the 2 returns stream, the ensuing returns stream in blue has low to minimal volatility because of the inverse correlation.

When you are able to engineer such a smooth returns with good risk adjusted characteristic (returns/volatility = Sharpe/ Sortino ratio), you can always lever up the blue line.

You can extrapolate this concept to multiple returns stream/ positions.

All of this is an abstract and you have to note that historical correlation/covariance matrix may change so you have to add additional filters.

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I get what you're saying. Interesting concept. I am seeing a positive day almost every day. Of course, the market is bullish right now. But still...I can see a case for taking on leverage since I'm using a basket of stocks.
 
Smart Money said:
I’m just holding three stocks. So I guess technically the loss would be whatever gap down could catch me by surprise, or my stop. I’m not using leverage at all. I’m just trying to make 1/2% per day on average.
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3 stocks is super focused; great if all goes right.[WHEN i was trading single stocks , i figured it could gap against me 50%,even though it never did]
7 is a good number.
Sounds like you are right ,3 is too focused \even more so, if close to same sector.
50% gap against you may or may not happen; --20%\30% gaps are very common in single stocks........................................................................................................Using cash is in your favor
 
Smart Money said:
I get what you're saying. Interesting concept. I am seeing a positive day almost every day. Of course, the market is bullish right now. But still...I can see a case for taking on leverage since I'm using a basket of stocks.
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There's a book that deals with what sef88 was talking about. If I can remember the name of it...I'll post a link to it on Amazon.

wrbtrader
 
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