Noesis
Level 1 — RecognitionRisk & Money Management

Risk & Money Management

⏱ 20 minutes30 marksprintable — key stays hidden on paper

Time Limit: 20 minutes Total Marks: 30 Instructions: Answer all questions. For True/False items, a correct justification is required for full marks. Show reasoning where indicated.

Section A — Multiple Choice (1 mark each) [10 marks]

Q1. Under the standard "1-2% rule," how much of a $50,000 account should be risked on a single trade at the 2% level?

  • A) $250
  • B) $500
  • C) $1,000
  • D) $2,000

Q2. The position size formula for a stock trade is best expressed as:

  • A) Account Size ÷ Stop Distance
  • B) Risk Amount ÷ Stop Distance (per share)
  • C) Risk Amount × Stop Distance
  • D) Account Size × Entry Price

Q3. Maximum drawdown measures:

  • A) The largest single-day gain
  • B) The peak-to-trough decline in account equity
  • C) The average daily loss over a year
  • D) The total number of losing trades

Q4. A daily loss limit / circuit breaker is primarily designed to:

  • A) Guarantee profits each day
  • B) Stop trading after a defined loss to prevent emotional overtrading
  • C) Increase leverage after losses
  • D) Eliminate all losing trades

Q5. The Kelly Criterion is used to determine:

  • A) The stop-loss price
  • B) The optimal fraction of capital to bet given edge and odds
  • C) The correlation between two stocks
  • D) The daily loss limit

Q6. Total portfolio exposure limits refer to:

  • A) The maximum number of brokers used
  • B) A cap on the combined capital at risk across all open positions
  • C) The commission paid per trade
  • D) The dividend yield of the portfolio

Q7. Two positions that are highly positively correlated:

  • A) Reduce overall portfolio risk
  • B) Tend to move together, increasing concentrated risk
  • C) Always hedge each other
  • D) Have no effect on risk

Q8. A basic hedge is intended to:

  • A) Maximize leverage
  • B) Offset potential losses in an existing position
  • C) Guarantee doubling of returns
  • D) Remove the need for stop-losses

Q9. "Risk of ruin" refers to the probability of:

  • A) A single winning streak
  • B) Losing enough capital that trading can no longer continue
  • C) Missing a profitable trade
  • D) Paying too much commission

Q10. "Sizing up and down with performance" (anti-martingale) means:

  • A) Increasing size after losses, decreasing after wins
  • B) Increasing size during winning periods, reducing during losing periods
  • C) Keeping size fixed forever
  • D) Only trading one share at a time

Section B — Matching (1 mark each) [8 marks]

Q11–Q18. Match each term (left) to its correct description (right). Write the letter next to the number.

# Term Description
11 1-2% rule A Fraction of capital = edge/odds
12 Position sizing B Peak-to-trough equity decline
13 Maximum drawdown C Cap on risk per single trade
14 Kelly Criterion D Shares = risk $ ÷ stop distance
15 Correlation risk E Offsetting an existing exposure
16 Hedging F Positions moving together amplify loss
17 Risk of ruin G Halt trading after a set daily loss
18 Daily loss limit H Probability of depleting capital

Section C — True/False with Justification (2 marks each: 1 answer + 1 justification) [12 marks]

Q19. True or False: Risking 10% of your account on every trade is consistent with sound money management. Justify.

Q20. True or False: If you risk 300andyourstopis300 and your stop is 2 per share, your position size should be 150 shares. Justify.

Q21. True or False: Holding five strongly positively correlated tech stocks provides good diversification. Justify.

Q22. True or False: The "full Kelly" fraction is often reduced (e.g., half-Kelly) to lower volatility and drawdown. Justify.

Q23. True or False: A tighter (smaller) stop distance allows a larger position size for the same dollar risk. Justify.

Q24. True or False: Increasing position size after a string of losses is a safe way to recover quickly. Justify.

Answer keyMark scheme & solutions

Section A — MCQ (1 mark each)

Q1. B) 500.∗∗∗Why:∗2500.** *Why:* 2% × 50,000 = 1,000...check:1,000... check: 50,000 × 0.02 = 1,000.Correctansweris∗∗C)1,000. Correct answer is **C) 1,000. (Corrected) 2% of 50,000=50,000 = 1,000 → C. (1 mark)

Q2. B. Position size = Risk Amount ÷ Stop Distance per share; this converts dollar risk into share quantity. (1 mark)

Q3. B. Max drawdown is the largest peak-to-trough equity decline, a key measure of downside pain. (1 mark)

Q4. B. Circuit breakers stop trading after a defined loss to curb emotional/revenge trading. (1 mark)

Q5. B. Kelly gives the optimal fraction of capital to stake given win probability and payoff odds. (1 mark)

Q6. B. Portfolio exposure limits cap total capital at risk across all open positions combined. (1 mark)

Q7. B. High positive correlation means positions move together, concentrating rather than spreading risk. (1 mark)

Q8. B. A hedge offsets potential losses in an existing position. (1 mark)

Q9. B. Risk of ruin = probability of losing so much capital that continued trading is impossible. (1 mark)

Q10. B. Anti-martingale: size up when winning, size down when losing. (1 mark)

Note to marker: Q1 correct key = C ($1,000). Accept C.

Section B — Matching (1 mark each)

Q Answer Why
11 C 1-2% rule caps risk per single trade
12 D Position size = risk $ ÷ stop distance
13 B Drawdown = peak-to-trough equity decline
14 A Kelly fraction = edge/odds
15 F Correlated positions move together, amplifying loss
16 E Hedging offsets existing exposure
17 H Risk of ruin = probability of depleting capital
18 G Daily loss limit halts trading after set loss

Section C — True/False with Justification (2 marks each)

Q19. FALSE. (1) Justification (1): The 1-2% rule limits per-trade risk to 1-2%; 10% risks rapid account depletion and greatly raises risk of ruin.

Q20. TRUE. (1) Justification (1): Shares = 300÷300 ÷ 2 = 150. Correct application of position-sizing formula.

Q21. FALSE. (1) Justification (1): Strongly correlated stocks move together, so real diversification is minimal; concentration/correlation risk remains high.

Q22. TRUE. (1) Justification (1): Full Kelly is volatile with deep drawdowns; fractional (e.g., half) Kelly reduces variance while retaining most growth benefit.

Q23. TRUE. (1) Justification (1): Since shares = risk $ ÷ stop distance, a smaller stop distance in the denominator yields a larger share count for the same dollar risk.

Q24. FALSE. (1) Justification (1): This is the martingale approach; increasing size after losses accelerates ruin risk. Sound practice sizes down during losing streaks.

[
  {"claim":"2% of $50,000 = $1,000 (Q1 = C)","code":"result = (0.02*50000 == 1000)"},
  {"claim":"Position size Q20: $300 / $2 = 150 shares","code":"result = (300/2 == 150)"},
  {"claim":"Q23: smaller stop distance gives larger size (risk 300, stop 1 vs 2)","code":"result = (300/1 > 300/2)"},
  {"claim":"Half-Kelly < Full-Kelly for any positive Kelly fraction f","code":"f=Rational(1,4); result = (f/2 < f)"}
]