What is ideal Risk Management method/methods s for stock portfolios with 25-30 stocks and around 50.000 USD invested in those stocks. Every stock bought will be kept in the portfolio for 1 to 12 months. (no day-trading)

I have been working in a bank where we use Value-at-Risk. My intuition tells me that VaR will be preferable for bigger portfolios and it might not be ideal in my case.

So; what kind of Risk Management tools/methods will you recommend?

I have not yet decided how "Risky" I am and how I will let Risk Manegenemt influence my strategy. At first I just want to setup a Risk Management system for having an overview.

up vote 1 down vote accepted

Assuming this is a "long only" portfolio and the stocks are fairly diversified sector-wise:

A portfolio of 25-30 more or less equally weighted stocks most likely will have a strong-ish positive correlation with a broad indexes such as S&P500. If this is the case, then you can define limits (volatility based stop-loss, VaR/CVaR, MaxDD) depending on your risk tolerance. Furthermore, just recently Asness of AQR proposed an interesting way of modelling risk using VIX. That model could be improved as he kept naming it "a toy".

If the idea is to have a low correlation/beta with the market, then you have to:

  • identify your benchmark;
  • analyze individual stock volatilities and correlations/covariances;
  • analyze total portfolio volatility and beta against the benchmark;
  • look at risk/volatility contribution (in terms of either standard deviation or VaR/CVaR) of each stock;
  • define limits (volatility based stop-loss, VaR/CVaR, MaxDD -- both individual and aggregate) based on your risk tolerance;

This might be far from ideal for you, but should at least give some information on risks of your investments/portfolio.

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