Practical Methods of Financial Engineering and Risk Management by Rupak Chatterjee

Author:Rupak Chatterjee
Language: eng
Format: epub
Publisher: Apress, Berkeley, CA

Maintain sector neutrality. (Don’t ignore the betas to the ETFs.)

Use only modest risk capital leverage—say, 2 (such that for $1 dollar of risk capital, one can go long $2 and short $2).

Monitor the volatility of the net trading strategy. Many clients need a trading strategy with an annualized volatility of 10–15%.

The Rolling NAV Equation

To provide a backtest of a trading strategy, one needs to perform a time-evolution of the P&L of the net trading strategy. One simplified method for doing this is to use the following equation:

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