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In a message dated 07/12/2000 2:59:06 PM Eastern Daylight Time,
mst1@xxxxxxxxx writes:
<< Although i understand
your point Gitanshu, extrodinary risk is just that, Extrodinary. Must we
plan for the worst in all trades since it will only happen once in a great
while, or shouldn't we use portfolio diversification to lessen the
probability of catastrophic loss? >>
Yes in my opinion we should plan for extraordinary for extraordinary risk
because unfortunately if we are long enough in the market at some point we
will have to face it.
Yes also we should use portfolio diversification but this is not bullet proof
because you will have to face also extraodinary risk with linked trades. The
correlation in a diversified portfolio may not always be obvious or may vene
change therefore you have to try to mesure your risk on individual trades AND
the risk on the overall portfolio.
As for the gapping risk it is not what it used to be now that markets are
trading almost round the clock. But even if a system works very well, it may
be wise to exclude of the portfolio selection markets that have no liquid
night session to minimize the gapping risk.
Jean Jacques
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