You will write a risk rulebook and test a portfolio of up to 15 positions against it.
Over this module Marcus wrote a line here and a line there: a sizing method, a Kelly ceiling, limits, a cluster cap, theses, a stress rule and a currency policy. Scattered across seven lessons, they're notes. Gathered on one page, with a stress test beside them and a record of what they forced, they become the rulebook he'll run his money by. This exercise builds that page and the stress test tab that checks the portfolio against it.
Allow about forty-five minutes. You'll need your holdings with values in SGD, the limits and theses you drafted in lessons 11.1 to 11.7, and proxy index data for the stress test. The rulebook should cover a portfolio of up to 15 positions, which is about as many as one person can keep a written thesis on.
The page has five short sections. Each rule is one or two sentences, and each states what happens when it's broken.
Sizing comes first: your method from lesson 11.1, Position sizing: equal, conviction and volatility weights, and your ceiling from lesson 11.2, The Kelly criterion and why professionals use a fraction of it. Limits come next: single stock, sector counted through funds and country, from lesson 11.3, Position and sector limits, and concentration risk, plus the cluster cap from lesson 11.5, Correlation clusters: hidden bets across your holdings. Third, the review rules: a thesis for each holding, the evidence that would make you sell, and the events that trigger a review, from lesson 11.4, Thesis review instead of price stops. Fourth, the stress rule: the most you'll accept losing in any scenario, in SGD and as a percentage. Last, the currency policy from lesson 11.7, Currency risk and when hedging earns its cost.
Here is Marcus's page, condensed.
Sizing: single stocks equal weighted at 5% of the portfolio, or 4% if volatility is above 30%, and never above a quarter of the Kelly fraction on my own estimate of edge. Limits: trim any stock more than one point over target; no sector above 15% counted through funds; Singapore shares no more than 25%; any group sharing one driver capped at 20%, except core world equity and bonds. Review: a written thesis and two or three sell signals for each stock, reviewed at every results announcement, management or auditor change and debt event; a price fall prompts a reread, never a sale on its own. Stress: no scenario may cost more than 40% of the portfolio. Currency: shares unhedged, bonds and cash in SGD or hedged to SGD, and the cost of a hedge checked once a year
Leave space at the bottom for one more section, rebalancing, which lesson 12.2, Rebalance a mix of ETFs and single stocks to a written rule, adds.
Make a small table: one row per rule, a column for the limit, a column for today's figure and a column marked pass or breach.
Marcus's table showed four breaches. His bank at 7.9% and chip designer at 7.4% were over their single-stock targets of 5% and 4% by more than a point. His Singapore shares, at about 27.7%, broke the 25% country limit. His Singapore rates and regional growth cluster, the bank, STI ETF and S-REIT, broke the 20% cluster cap at about 23.8%. Semiconductors sat exactly on the 15% sector limit.
Create a tab called Stress. One row per holding, with its value in SGD, its proxy index and a column for each scenario: two historical periods and one shock of your own design, as in lesson 11.6, Stress test against past crises and made-up shocks. Each scenario column holds the proxy's loss and the holding's loss in SGD. Total each column in SGD and as a percentage, and put the stress rule beside the totals.
Marcus's made-up results: a 2008-style crisis costs about S$81,150, or 40.2%; a 2020-style crash about S$50,000, or 24.8%; his rates-up, shares-down shock about S$37,400, or 18.5%, with his bond fund losing about S$3,900 at the same time as his shares. The first breaks his 40% rule.
The last section of the page is a dated record of changes, in which each entry names the rule that forced it, what changes and what the stress test shows once the change is made.
Marcus's entry read: "Trim bank to S$10,100, selling about S$5,900, for the single-stock limit. Trim chip designer to S$8,080, selling about S$6,920, for the single-stock limit. Trim S-REIT to S$10,100, selling about S$1,900, for the cluster cap. Add the S$14,720 raised to the world ETF. After the changes: cluster about 19.9%, Singapore shares about 23.9%, semiconductors about 12.1% counted through funds, 2008-style loss about S$79,200 or 39.2%. Open question for my yearly review: whether part of the bond fund should move to shorter duration, since the rates shock hits bonds and shares together."
Notice two things. He hasn't traded yet: the trades go through his rebalancing rule in lesson 12.2. And the changes barely moved the crisis loss, because most of it comes from his 80% allocation to shares, which is a decision that belongs to his investment policy rather than to this page.
One page with five sections of rules, each with its action when broken, and space for a rebalancing section. A check table showing every rule as pass or breach. A Stress tab with every holding, two historical scenarios and one designed shock, totals in SGD and percent, and the stress rule beside them. A dated record of each change the results forced. If every rule passes on your first try, check whether your limits are tight enough to have ever bitten, because a rule that never binds only describes the portfolio you already have.
Now write your own page, run the stress tab on your portfolio, and record what it forces.
Write a one-page risk rulebook, run the stress test tab on your portfolio and record each change the results forced.
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