4.4. One-Dimensional System of Capital Allocation

Allocation of capital using a one-dimensional system is relatively simple. This allows the strategy developer to examine in detail different factors that influence portfolio under construction. Here we demonstrate the effects of three such factors. Next we describe the methodology for measuring the degree of capital concentration within option portfolios and provide several approaches that enable the manipulation of the capital concentration depending on the strategy-specific requirements.

4.4.1. Factors Influencing Capital Allocation

In this section we investigate the influence of various factors on the capital allocation process. While in the previous sections we merely demonstrated the technique of portfolio construction using a limited and predetermined number of combinations, here we consider the long-term functioning of a comprehensive trading system.