A correction in the equity market refers to a downward movement in stock prices after a sustained period of growth. Market corrections can be triggered by various factors such as economic indicators, changes in investor sentiment, or geopolitical events. During a correction, stock prices may decline by a certain percentage …

In a previous post, we discussed a theoretical model for studying the effectiveness of stop losses. In this post, we will present an empirical study of their efficacy in the commodity market. Reference examined how fixed and trailing stop losses perform in this market. The authors pointed out, This …

Covariance plays an important role in portfolio construction as it measures the relationship between the returns of different assets in a portfolio. Understanding covariance helps investors to diversify their investments effectively by selecting assets that are not highly correlated with each other. Covariance also allows investors to assess the impact …

A stop loss serves as a risk management tool, helping investors limit potential losses by automatically triggering the sale of a security when its price reaches a predetermined level. This level is set below the purchase price for long positions and above the purchase price for short positions. By implementing …

Stock-bond correlation is a critical factor in portfolio diversification, influencing how different asset classes interact during market movements. The correlation between stocks and bonds helps investors understand the degree to which these two assets move in relation to each other. In the years of 2010s, stocks and bonds have had …

Realized volatility (RV) is a measure that captures the degree of price fluctuation in a financial instrument over a specific period. This metric is valuable for investors and traders as it reflects the true price action experienced by an asset, aiding in risk assessment and strategy development. Realized volatility contrasts …

The VIX, commonly known as the “fear gauge,” is a model-free index that serves as a reflection of market volatility expectations for the upcoming 30 days. Essentially, it represents the price of a basket of short-maturity options. The VIX is calculated from the S&P 500 index options’ prices, offering a …

Delta hedging is a risk management strategy widely used in financial markets, particularly in options trading. The primary objective of delta hedging is to offset or neutralize the directional risk, or delta exposure, associated with an options position. Delta represents the sensitivity of an option’s price to changes in the …

Value at Risk (VaR) is a widely used risk metric in finance, providing an estimate of the potential loss on a portfolio or investment over a specific time horizon, under normal market conditions. It quantifies the level of financial risk within a certain confidence interval, expressing the maximum loss that …

Position sizing is a critical element in effective portfolio management, playing a pivotal role in determining the overall risk and return characteristics of an investment portfolio. Proper position sizing involves allocating an appropriate proportion of capital to each investment, considering factors such as the investor’s risk tolerance, investment goals, and …