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Chapter 4. Capital Allocation and Portfolio Construction

Chapter 4. Capital Allocation and Portfolio Construction

Regardless of the type of financial instruments used in the investment process—futures, stocks, currencies, or options—capital management represents an important and complex process. Its significance and influence on trading results is hard to overestimate. The general system of capital management can be viewed at two levels.

The first level represents the distribution of funds among risk-free money market instruments and the risky assets. The principles of creating the first level of a capital management system do not depend on the trading instruments involved and are universal for both options and stock portfolios. There is a multitude of publications on that subject. One of the most useful and complete handbooks on developing the first level of a capital management system is a book by Ralph Vince (Vince, 2007). We will not discuss the details of the first level here.


  

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