CHAPTER 10

The Geometry of

Leverage Space

Portfolios

J

ust as everyone is at a value forfwhether they acknowledge it or not,
so too therefore is everyone in leverage space, at some point on the
terrain therein, whether they acknowledge it or not. The consequences
they must pay for this are not exorcised by their ignorance to this.

Dilution

If we are trading a portfolio at the full optimal allocations, we can
expect tremendous drawdowns on the entire portfolio in terms of equity
retracement.
Even a portfolio of blue chip stocks, if traded at their geometric optimal
portfolio levels, will show tremendous drawdowns. Yet, these blue chip
stocks must be traded at these levels, as these levels maximize potential
geometric gain relative to dispersion (risk), and also provide for attaining
a goal in the least possible time. When viewed from such a perspective,
trading blue chip stocks is no more risky than trading pork bellies, and pork
bellies are no less conservative than blue chip stocks. The same can be said
of a portfolio of commodity trading systems and a portfolio of bonds.
Typically, investors practice dilution, whether inadvertent or not. That
is, if, optimally, one should trade a certain component in a portfolio at the
f$ level of, say, $2,500, they may be trading it consciously at anf$ level
of, say, $5,000, in a conscious effort to smooth out the equity curve and
buffer drawdowns, or, unconsciously, at such a half-optimalflevel, since

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