Macro Book

Risk: Measuring Risk

Welcome to another article from the Macro Book. In the third section of our series, I will explore the ideas and intricacies of risk and position sizing in more detail.

As a reminder for all new subscribers, I announced late last year that I will publish a series of articles about PAMB (Paper Alfa Macro Book). This will encompass all relevant elements of a full investment process. We will cover the following important stages.

1. Idea Generation (Article 1, Article 2)

2. Idea Structuring (Article 1, Article 2)

3. Risk / Sizing (Article 1)

4. Portfolio Construction

5. Risk Management

This will be fun and educational, aiming at anyone interested in all the necessary aspects to make this actionable. I will also make it interactive and provide useful tools for those interested.

Finally, we will run a portfolio of fictional trades encompassing any available tradeable, liquid asset class. All subscribers will be able to participate in the idea generation. We can even set up a mini-investment committee to steer the portfolio. It will be, therefore, more strategic than a day-trading vehicle.

Source: Dall-e

In the first instalment in the risk section of the macro book, we covered the aspect of the nature of risk, what risks we engage in when investing and what it means to be a risk taker. In this second risk article, I will focus on measuring risk and how I go about it. This will also be an instrumental pillar when looking at the sizing of positions, which I will cover in a subsequent post.

Let’s dive straight into it.