money_manag01

money_manag01 - An Introduction to Money Management by Dr....

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Unformatted text preview: An Introduction to Money Management by Dr. Fernando Diz Money Management What is it in the context of trading? It consists of determining the most efficient use of investment capital after the evaluation of the risk and reward in a trade or portfolio. Efficiency in this context is preference based! Money Management How can we define efficiency? The same way we define it in portfolio theory: in risk-reward terms. Money Management What does money management specifically involve? 1. Determining different kinds of risk in a portfolio or trade. 2. Deciding what amount of risk to take on a trade or portfolio. 3. Determining the amount of potential return for a given level of risk. Money Management 4. Analyzing the risk-reward tradeoffs. 5. Implementing the trade, strategy, etc. based on the previous process. Ultimately, money management is about deciding the type of equity curve that we want to achieve. Money Management Equity Curves 2 4 6 8 10 12 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Money Management Money management is about which path you want to undertake. Money Management 1. Determining different kinds of risk in a portfolio or trade. Risks associated with trading: 1. Avoidable risk : It is the risk that can be avoided or eliminated without any reduction in the potential return. Diversification Avoiding illiquid markets. Avoiding trading in very illiquid periods. Money Management Unavoidable risk : risk that cannot be reduced without compromising return....
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This note was uploaded on 02/09/2010 for the course FIN 459 taught by Professor Yildary during the Spring '07 term at Syracuse.

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money_manag01 - An Introduction to Money Management by Dr....

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