CHAPTER 12

The Leverage

Space Portfolio

Model in the

Real World

n.b. The balance of this text attempts to show a vi-

able means for applying the theories in Part I of

the text, “The OptimalfFramework,” and the resul-

tant portfolio model of Chapter 10, “The Leverage

Space Model.” As such, terminologies used will re-

flect the new model. Rather than speak ofmarket

systems, we will refer toscenario spectrums. Rather

than speak oftradesorplays,orresults over a cer-

tain period,we will speak ofscenarios.However, the

reader is alerted of the interchangeability of these

terms.

I

n applying the concepts of the Leverage Space Model in the real world,
the problems can be twofold. First, there is the computational aspect.
Fortunately, this can be overcome with computer power and good soft-
ware. There is no reason, from a computational standpoint, tonotemploy
the Leverage Space Portfolio Model. The discernment of the scenario spec-
trums, their constituent scenarios, and the joint probabilities between them
are no more incalculable than, say, a stock’s beta or a correlation coefficient.
The second impediment to employing these concepts in the real world
has been that people’s utility preference curves arenotln. People do not
act to maximize their returns. Rather, they act to maximize returns within
an acceptable level of risk.
This chapter shows how to maximize returns within a given level of risk.
This is a far more real-world approach than the conventionally practiced
mean-variance models. Further, risk, as used in this chapter, rather than

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