Risk Monitor System

Daily P&L and position sizes should be checked daily. Full risk review (drawdown, sector exposure, correlations) weekly. In volatile markets, increase frequency. Set up alerts for immediate notification of breaches.

Start with 5% maximum per position if conservative, 10% if moderate. This ensures no single position can cause catastrophic damage. As you gain experience, you may adjust, but rarely exceed 15%.

Stop trading for the day. Close any positions that are clearly wrong (optional). Do not try to 'make it back.' Review what went wrong in the evening. Start fresh the next day with a clear head.

Record your portfolio's peak value. Calculate: Drawdown = (Peak - Current) / Peak × 100%. Update the peak whenever portfolio reaches a new high. Most portfolio trackers and broker platforms show this.

Create a spreadsheet with columns: Metric, Current Value, Limit, Status. Track: Portfolio Value, Daily P&L, Drawdown, Largest Position %, Top Sector %. Color code status (green/yellow/red). Update daily.

Portfolio Beta = Σ(Position Weight × Position Beta). Look up each stock's beta (from broker or Yahoo Finance). Multiply by its weight in your portfolio. Sum all weighted betas. The result is your expected move for 1% market move.

A common guideline is 95% daily VaR should not exceed 2-3% of portfolio. So for $100K portfolio, 95% VaR should be under $2,000-$3,000. This means on 95% of days, you won't lose more than this.

Diversify across sectors (not all banks). Add uncorrelated assets (bonds, gold). Reduce clusters (if you have 4 bank stocks, reduce to 1-2). Monitor pairwise correlations and reduce when average is too high.

Reduce position sizes (often 30-50%). Widen stops (volatility means more noise). Increase cash allocation. Avoid new positions until volatility subsides. Consider hedges if not already in place.

Apply historical or hypothetical scenarios to current holdings. For example, 'What if 2008 repeated?' Look up how each holding performed in 2008, apply those returns, calculate portfolio P&L. If loss is unacceptable, reduce risk.

Parametric VaR assumes returns are normally distributed and uses volatility × z-score. Historical VaR uses actual past returns and finds the percentile. Historical captures fat tails better but assumes history repeats. Parametric is simpler but underestimates tail risk.

Calculate net portfolio delta, gamma, theta, vega by summing across all positions. Set limits for each Greek. Delta-hedge if want neutral. Monitor gamma especially near expiration. Know your daily theta burn. Manage vega before volatility events.

Standard VaR assumes you can exit at current prices. Liquidity-adjusted VaR adds the cost of exiting (bid-ask spread, market impact). For large or illiquid positions, this can significantly increase true risk. Add liquidation cost to base VaR.

Institutions typically set: VaR limits (daily and aggregate), position limits (single name and sector), drawdown stops, concentration limits, and liquidity requirements. Limits are set by risk committee based on risk appetite and regulatory requirements.

Marginal VaR is the change in portfolio VaR from adding a small position. It shows which positions contribute most to risk. Use it to optimize: reduce positions with high marginal VaR, add positions with low or negative marginal VaR (diversifiers).