Free module · Quantitative toolkit
Risk Management
Edge doesn't matter if you size wrong. This is the math that decides whether you are still here next year.
sizing · risk
The building blocks
- Choose a sign convention before measuring risk.
- Here a loss is the negative of profit.
- Describe the loss distribution
- Separate volatility, quantiles and tail averages
- Stress the assumptions and size exposure
Lessons in this module
- Start with gains, losses and an ordered sample
- Value at Risk and maximum drawdown: two views of the bad days
- Sharpe ratio: return per unit of risk
- Kelly criterion: the fraction that maximises growth
- Monte Carlo: your backtest is one draw from a distribution
- Expected shortfall and scenario risk
Practice and apply
- Sizing a strategy with Kelly and drawdown constraints — Strategy: p = 0.5, wins 1.8× losses · account $50,000 · you want ½ Kelly · max acceptable drawdown 25%
- Annualising and stress-testing a Sharpe — Monthly returns over 3 years: mean +1.2%/month, σ = 3.5%/month · risk-free 0.3%/month
- Sign convention — A trade has profit −12 dollars. What is its loss?
Work through the practice exercises · Quant development tools