Macrobook
Risk: Risk Units & Fixed Income Sizing
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 would 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.
Risk / Sizing (Article 1, Article 2, Article 3)
Portfolio Construction
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.
In the third article in the risk section of the macro book, we conducted several simulations of a hypothetical coin-tossing game with and without an edge. We also looked at some academic papers and then covered the elements of the well-known Kelly Criterion. The results gave you a coherent and intuitive understanding of what elements determine the amount you should be risking if you want to accumulate wealth over time.
This new article will take this one step further as we take all the insights from the previous risk articles and use real-time examples of how I think about risk sizing. This will also include a special section on fixed-income instruments and a few spreadsheets you can play around with. This will hopefully be all fun and educational.
Let’s go!