The Leverage Space Model 299
stake (versus the peak of the landscape) for operating at different levels
of leverage (remember, leverage has two meanings throughout this book),
or exactly what kind of aminimumdrawdown to expect for operating at
different levels ofleverage. Under the new framework, you can more readily
see how important the asset allocation function is to your bottom line and
your pain threshold.
To summarize, the new framework is superior to the older, two-
dimensional, risk-competing-with-return frameworks primarily because the
focus is on thedynamicsof leverage. Secondarily, it is superior because
the input is more straightforward, using scenarios (i.e., actual distributions
that are “binned”) unperverted by the misuse of the delusional correlation
coefficient parameter, and because it will work on any distribution of re-
turns. Lastly, users of the new framework will more readily be able to see
the rewards and consequences of their actions.
Multiple Simultaneous Plays
Refer to Figure 9.2 for our two-to-one coin-toss game. Now suppose you
are going to play two of these very same games simultaneously. Each coin
will be used in a separate game similar to the first game. Now what quantity
should be bet? The answer depends upon the relationship of the two games.
If the two games are not correlated to each other, then optimally you would
bet 23% on each game (Figure 9.3). However, if there is perfect positive
correlation, then you would bet 12.5% on each game. If you bet 25% or more
FIGURE 9.2 Two-to-one coin toss game, 40 plays. Ending multiple of starting
stake betting different percentages of stake on each play