Adrian Reid explains why equal dollar positions create unequal portfolio risk when stocks have different volatilities. A $1,000 trade in a volatile stock swings more than a $500 trade in a stable one. Size positions so each one's expected dollar movement is roughly the same.
Yeah. What we're trying to do essentially is normalize the dollar fluctuation across all our positions. Because if you've got a thousand dollar trade and a $500 trade and they move up and down by, by.
1% per day, the thousand dollar trade has a bigger dollar impact on your portfolio. Right.
Still 1%, but it's a bigger position.
If you have two stocks. One of them is twice as volatile as the other and you put $500 into each. One of them moves like this, the other one moves like that. Okay? So this one will only have a very small impact on your portfolio. That one will wiggle your portfolio up and down. What we do is adjust the sizes of those two trades so that the dollar fluctuation is basically so theoretically equal. Yeah, it's not perfect, but it's, it's better than having equal dollar amounts. When one share is really volatile, one share is really quiet.
Sam.
