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OGHET.  See Scientific method Optimal f, 245–251Optimism, importance of, 4Options:
asymmetric payoff functions,
150–151
implications of, generally, 148–149implied volatility, 86–89, 150leverage, 151–153nonlinear pricing dynamics, 149pricing, 88–89, 106strike price/underlying price,
relationship between, 149–150
volatility arbitrage, 106Out-of-the-money option, 150Over-the-counter derivatives, 148
Performance analysis, 7–8Performance metrics, 16, 35Performance objectives:
“going to the beach,” 32–36importance of, 19–20, 29nominal target return, 20, 24–26optimal target return, 20–24stop-out level, 20–21, 26–32
Performance ratio, 188–200Performance success metrics:
accuracy ratio (win/loss), 184–186impact ratio, 186–188performance ratio, 188–200profitability concentration (90/10)
ratio, 200–208
Planning, importance of, 9. See also
Investment plan
Portfolio construction, 117, 224–225Portfolio decentralization, 174Portfolio dynamics, 235Portfolio management, generally:
irrational, 243 long/short, 136–141red flags, 235–236success factors, 213valuation and, 194
Portfolio selection, 187–188, 194,
202–203, 223–225Positive correlation, 175Press releases, 225
Price dispersion, estimation of, 88Price sensitivity, 203Private equity investments, 217Professional money management, 233Profitability, 8, 69, 139–140, 170, 172,
198–199, 247
Profitability concentration (90/10)
ratio, 200–208Profitability profile, 129Profit/loss (P/L). See also specific
types of P/L
attribution, 165–166daily, 40–41, 48–51histogram, 51–53maximization strategies, 192–200patterns, analysis of, 37–79in risk determination, 226–228time series analysis, 6–7
Profit profile, 146
Raw impact ratio, 187Recovery Hurdle, 130Recovery period, 50, 71–72Relative Strength Indicator (RSI), 186Relative value fixed income, 105Relative-value traders/trading, 167, 224Resistance level, 107–108Return, defined, 65–66. See alsospecific types of returnsReturn over Maximum Drawdown
(ROMAD), 71–72
Revenue stream, importance of, 110Risk-adjusted returns, 10–11, 67, 93, 112,122, 139, 141–142, 174, 230, 243
Risk aversion, 21Risk capital, 12–15, 27, 29, 79, 152–153,
227
Risk control strategies, 10, 31, 92, 187,
193, 199–200, 223–224
Risk exposure:
adjusting transactions, 81–82asymmetric payoff function, 130, 132implications of, generally, 11–13netting risk, 129–130range determination. See Exposure
range determination
Risk-free rate, exposure ranges, 112
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Risk-free return, 65–66Risk Management Investment, 1–5,
median P/L, 68percentage (%) of winning days,
9–18
Risk mitigation, 136, 152Risk models, 28–29Risk of ruin, 245–246, 250–251Risk profile, 12Risk-taking capacity, 115–117, 233Risk tolerance, 26–27, 63Risk transference, 241
Scenario analysis, 84, 104–106Scientific method, 5–6Self-directed traders, 123Self-funded traders, 110Serial correlation, 76–78Sharpe Ratio, 65–68
equation, 65Inverted, 111–114, 248–250limitations, 67–68Sustainable, 112, 249Short put options, 153Short selling, 148–149, 152–154, 207Short-side P/L, 166–168(cid:2)/(cid:6)P/L, 62, 95, 116, 118Size of position, significance of,
134–135, 159, 231Skewness, 64–65, 70, 201Slippage, 198South Sea Bubble, 54–55Spreadsheet programs, 61Standard deviation, 57–65
confidence intervals and, 59–62equation, 61of returns, 66sigma, 62VaR parameters, 99–100
Static parameters, 87Statistical significance, 40–42Statistics:
average P/L, 56–57, 69confidence intervals, 59–62, 100consolidated statistical profile, 
79–80
correlations, 73–79drawdown, 70–73historical perspective, 53–56
68–69
performance ratio, 68–69Sharpe Ratio, 64–68, 100standard deviation, 57–66winning days vs. losing days, 69–70
Stock index, benchmark, 73–74Stock market crashes, impact of,14–15, 43, 136, 173, 227Stop-loss orders, 9, 207–208Stop-out level, 20–21, 26–32, 118–119,
122–124, 190, 193, 227, 233–234
Strike price, 149–150Support  level, 107–108Sustainable Sharpe Ratio, 112, 
249–250
Target return(s):
nominal, 20, 24–26optimal, 20–24
Technical analysis, 77, 106–10810% Rule, 116, 122–123, 249, 251Time horizon, 53, 56, 142–144Time series, generally:
analysis/construction of, 6–7, 39charts, 107
Time spans, 39–40, 43–48Time units, 39–42, 46–48Time unit/time span matrix, 39, 48Timing, significance of, 220–221Total long/short capital utilized, 161Trade level P/L, 162Trade selection, 187Trading capital, risk exposure
determination, 114–126
Trading Capital Equation, 122–123, 
125
Trading efficiency, 223–224Trading environment, assessment of,
22–23
Trading frequency, 203–204Trading psychology, 208Trading styles, 200Trading with an edge, 219–225Transaction, defined, 158–160Transaction flow, 221–222
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Transactions-level analysis:
exposure range determination,
benefits of, 79core statistics, 161–168database, overview, 156–158position snapshot statistics, 160–161transaction defined, 158–160Two-sided market, 135–137, 140
Underlying markets, 117Underlying price, 149–150Unit impact ratio, 187
Value at Risk (VaR) calculation:accuracy testing, 98–99, 103and correlation analysis, 178–179implications of, generally, 84, 91–92justification of, 92–94parameter setting, 99–100in portfolio management, 102–104purpose of, 178types of, 94–98
Variance/covariance approach, VaR,
94–97, 99Vince, Ralph, 246Volatility:
-adjusted exposure, 83–84correlation analysis, 177–179
111–126
historical, 84–88, 96–97 impact of, generally, 40, 49–51, 65,
67, 74, 79
implied, 86–87, 89, 150options implied, 86–89position level, 141–142risk management, as trading capital
percentage, 114–126
size of position and, 134–135skew/smile, 88trading capital, impact on, 124Volume-Weighted Average Price
(VWAP), 159, 186
Wealth-management program, 30Weekly P/L, 41, 43Weighted average P/L, 164Win/loss ratio, 184–186Winning days, percentage (%) of, 68–70Winning trades, 186–188, 191, 193Working capital, 29, 122
Zero/low correlation, 172–173
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