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Risk and Money Management

Module Overview

Risk and money management is arguably the most important aspect of trading and investing. Having a strong understanding of various aspects of risk and deploying a strategy to control risks is extremely critical in protecting one’s capital and in achieving long-term success in trading and investing. The objective of this module is to equip readers with various aspects and strategies of risk and money management.

Chapters

1. Introduction to Risk and Money Management

7 Lessons

In this elementary chapter, we will familiarize the reader with what risk is and how the level of risk varies from one person to another as well as from one asset class to another. Lastly, we will introduce the concept of risk and money management, which forms the crux of this module.

2. Systematic Risks that Investors Face

6 Lessons

In this chapter, we will introduce the two types of risks that investors face: systematic risk and unsystematic risk. We will then process to explain in detail some of the key systematic risks that investors are exposed to and how to manage these risks.

3. Unsystematic Risks that Investors Face

7 Lessons

In this chapter, we will continue from where we left off previously and discuss some of the key unsystematic risks that an investor needs to be aware of, at all times, as well as how to mitigate them.

4. Risks that Traders Face

6 Lessons

In the previous two chapters, we talked about various risks that investors are exposed to. In this chapter, we will turn our attention to the other end of the spectrum, i.e., trading, and focus on the key risks that traders face.

5. Mean, Variance, and Standard Deviation

9 Lessons

By now, we know the basics of risk as well as the various risks that investors and traders are exposed to. Over the next few chapters, our objective is to explain various statistical ways of measuring and quantifying risk and return. In this chapter, we will focus primarily on Mean and Standard Deviation.

6. Returns Distribution, Skewness, and Kurtosis

3 Lessons

In this chapter, we will carry forward our discussion from the previous chapter and talk about the normal distribution, how to identify potential future range based on mean and standard deviation, and the concepts of skewness and kurtosis.

7. Covariance and Correlation

4 Lessons

In this chapter, we will talk about Covariance and Correlation, two tools that are widely used in statistical analysis and portfolio management to measure the relationship between two securities and diversify the portfolio to reduce risks.

8. Beta

3 Lessons

Over the past three chapters, we discussed some key statistical tools that help in analyzing individual risks of a security as well as in understanding the relationship between two securities. In this chapter, we will talk about another important statistical metric that helps in measuring the systematic risk of a security, Beta.

9. Portfolio Return, Variance, and Beta

4 Lessons

Now that we understand the individual stock-specific risk measurement metrics, it is time to focus on Portfolio. In this chapter, we will talk about portfolio risks and returns. We shall discuss how to calculate the expected return on a portfolio as well as how to measure portfolio variance, standard deviation, and Beta.

10. Calculating Covariance Matrix and Portfolio Variance in Excel

4 Lessons

In this chapter, we will explain how to calculate correlation matrix and covariance matrix comprising of multiple stocks, in Microsoft Excel. We will also explain how to calculate portfolio variance and standard deviation, in Excel.

11. Portfolio Optimization and the Efficient Frontier

2 Lessons

In this chapter, we will discuss portfolio optimization strategies and talk about the ways in which one can fine tune a portfolio with the objective of minimizing risk for a given level of return.

12. Coefficient of Variation, Sharpe Ratio, and Treynor Ratio

5 Lessons

In this chapter, we will talk about some key statistical ratios that can be used to measure and compare the risk and return characteristics of a portfolio.

13. Basics of Trading and Risk Management in Trading

6 Lessons

In this chapter, we will talk about how to get started in trading. We shall discuss some important things such as how much capital to allocate to trading, the importance of a trading plan, key factors to keep in mind before starting to trade, and a list of things that a trading plan must address.

14. Identifying Entry, Exit, and Reward Risk Ratio in Trading

5 Lessons

Now that we have discussed the basics of trading, it is time to move ahead and talk about some critical aspects of risk management in trading. In this chapter, we will focus on entry, target, and the reward to risk ratio.

15. Stop losses, their types, and Leverage in Trading

8 Lessons

In this chapter, we will talk about arguably the most important part of trading: stop losses. Besides, we will discuss leverage and provide some suggestions on stop losses.

16. Scaling In and Scaling Out

6 Lessons

In this chapter, we will focus on an interesting aspect that can be used in trading: Scaling in and scaling out of your positions.

17. Position Sizing

6 Lessons

In this chapter, we will talk about a critical aspect of money management in trading, called Position Sizing.

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