Hello everyone,
I have read the Black Book, and understand the rationale of he square root rule as it applies to reinvesting profits in highly leveraged systems.
My question relates to the Zorro web page (
https://manual.zorro-project.com/optimalf.htm):
In a multi-asset system, what is the rationale of taking the square root of the number of components?
// multi-asset system: reinvest the square root of profits separately per component and long / short trades
var AvailableCapital = Capital/sqrt(NumComponents);
Margin = ifelse(ForLongTrade,OptimalFLong,OptimalFShort)*AvailableCapital*sqrt(1+(WinLong-LossLong)/AvailableCapital);
To be clear, if I have a 5 component system, why can't I allocate AvailableCapital as:
var AvailableCapital = Capital / 5;
Thanks!
