5

Because we are modelling the underlying price process, not the value process of your stop-loss portfolio...


3

Not sure if this question deserves to be further piled onto, but alas... Large, institutional portfolios nearly always hold relatively illiquid and OTC traded instruments. There is no stop-loss order on a corporate bond or term loan, as an example. This is unrealistic even in equities. Let's say you hold 5% of the shares out on a small cap, do you just have ...


3

No, even if returns were perfectly normal (it really doesn't matter whether mean is zero and standard deviation is 1 - they can be anything), it wouldn't ensure that markowitz would perform well out of sample. The reason is because even if data is normally distributed it is hard to estimate means of returns. The standard error for an estimate of a mean like ...


1

This is a real life empirical example: my ex-colleague now runs a trend following strategy (with some leverage time-to-time) and did not lose money during the recent market crash all thanks to his stop loss triggers combined to the strategy. Stop losses are helpful and some big asset managers (I believe Aussies are in this category) do consider this a very ...


1

all metrics like VaR (how much you can lose on a given day) are based on a confidence interval in the distribution. but the most important part of risk management is tail risk /extreme loss, which can actually cause the business to go bust, and metrics like expected shortfall (if you end up in the tail, how ugly can things really get) are much more relevant ...


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