silentdud

Edit: sunnyjharris just said exactly what i was going to lol

It's not really improving your returns, i.e. your immediate ones, it should be improving them over time, but the idea is the same as controlling and making sure your capital reserve isnt depleted so much that you can't regrow it. You may want to look at the Safety first criteria. If you are looking for simple management that could be up your alley. It depends on how much money that you are managing.

I can see a few problems with optimal-f from just a quick look at it though. It is guilty of the same problem that problem that the Kelly criterion is, i.e. not looking at the instances around the mean, only at the estimated values. Does the modified version fix this?? Do you have any links describing its calculation? As far as I can tell it is only useful for ball parking and quick, on the spot math. I looked at this for information on calculating the original "optimal" f. Contango: Optimal f Thank you. Silentdud

lol that's exactly the same output as an excel momentum model I built once. You make it sound like it's quantum physics. Post the math not the argument, everyone else can test it.

The Kelly formula is only useful if you are taking on a single trade at once. You will not make money if you play a single trade of the same strategy at one time unless you are highly leveraged or you have a substantial cash reserve. Also you will take larger hits to your cash reserve. It's a good lesson for making basic trades, but it is really poor in terms of actual risk management. I know for a fact that Edward Thorpe used to use it, but he was old school and there have been so many innovations since then. For example, if you play 5 games of poker that are within your bankroll instead of one you are diversifying away some of the risk. On the other hand, when you try to do this with stocks there is a correlation of every single security to every single other security and you need to acknowledge this other wise you will loose a lot of money. It's also important to pay attention to skewness in return distributions (not accounted for in the kelly criteria) and Kurtosis (which Long Term Capital Management ignored and caused them to be ruined). Here are two popular books on portfolio management: Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series) The CFA institute publications are usually very good but this book includes extra types of portfolio management which you might not need. You may want to look at this one which is cheaper and its highly rated: The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk You should realize that a lot of the theory that is in these can actually be applied to modern portfolio theory. I also highly recommend that you look at some of Edward Thorp's papers, although they are highly outdated. [http://edwardothorp.com/id10.html]Edward Thorps publications[/url] Hopefully that helps! -Silentdud

Dear Max, If by market value you mean portfolio value,your rate of return is just: ROR =(MVend - MVbeg)/MVend However, if by market value, you mean the FMV of the positions open as part of a larger portfolio, you can probably do this: ROR = [(FMVclose + outflows)-(FMVopen+inflows)]/(FMVopen+inflows) = return for portfolio portion - ideally you would have a different return for each instance or position, which you probably know - It is not realistic to assume that the majority of inflows occurred at the start of trading activity. - I was an accountant too. MC

I would suggest you go a different way entirely. Do you need a reading list or something? Do you have a degree?

For example: Short Stock, 10,000/stockprice = shares with a market beta of 1.3 therefore take an offsetting long position in SPY to compensate for beta... (10,000*1.3)/SPY Price However, when using a multi factor: beta market = 1.27 beta SML = -.3..... , etc. Short stock 10,0000 Buy long SPY like above, but how to compensate for other betas?... what else to buy/short? Also has anyone played with using GARCH for fama french four factors??? what sort of time period do you use to estimate beta in these??? I also found this while I was looking around writing this, which may give me some of the size and style options what I can use: Fama-French Factor Loadings for Popular ETFs » The Calculating Investor

I'm not really looking for a debate. I just need a better way to neutralize most irrelevant portions of the returns so that I can specifically capture this abnormality (and nothing else). What is causing the abnormality and where it is from is separate issue. Im working with event driven stuff. I need a better way to neutralize other return factors aside from the movements relevant to other securities.

Tam's, how do you plan on actually capturing the returns in that chain through Forex and distinguishing it from noise? The effect from the QE2 ending will probably be realized way ahead of time. I don't think you can play it. I think that the FOMC is going to raise I-rates immediately following. What is core inflation at right now? What are the leading indicators for core inflation saying?

From what I understand when you have an alpha generating methodology, you can take an offsetting position in the market to neutralize most of the market risk. Has anyone tried offsetting their positions with industry ETF's instead of using SPY? Also, does anyone know of a simple way to eliminate SMB and HML factors from the payoff??? Are there ETF's with this payoff structure???