Presentation IMC 2019 - Logarithmic Risk Distribution to build a stable capital growth for any business or investment

Abstract

Capital investment, trading, or any business, all are activities involving risk. A proper capital management strategy to ensure long-term profitability is valuable nowadays. High price volatility in the stock markets, unpredicted or unusual economic and geopolitical news, or just hard to manage rare resources or human factors, all of these are instability reasons which can decrease capital efficiency or even cancel the profit over time. To manage the involved risk in any economic activity is a key factor for any manager today. Whatever the risk is estimated, the basic idea is always the same. To ensure long-term profitability, the investor has to save a part of the profit and to reinvest the rest to obtain a stable capital grow in time. The question this paper will answer is how much profit to save and how much to reinvest to produce stable capital growth and sustainable capital efficiency? The Logarithmic Risk Distribution will be presented, a practical method to size the risk level depending on the invested capital, on the used capital exposure level, and on the profit already made in the current business. It was found that the risk level can depend only on these three factors through a function that will provide an exponential capital grow even if the risk is higher than the realized profit. This paper will also include examples to prove the efficiency and simplicity of the presented method. The Logarithmic Risk Distribution is simple and easy to be applied in any business or investment.

Full text

Logarithmic Risk Distribution
to build a stable capital growth
for any business or investment.
Cristian Păuna
Economic Informatics Doctoral School
Academy of Economic Studies, Bucharest, Romania
13th International Management Conference
"Management Strategies for High Performance"
31 October-1 November 2019, Bucharest, Romania
This paper was financed by Algorithm Invest (algoinvest.biz)

Paper and research findings
Logarithmic Risk Distribution
A mathematical distribution function
to compute the risk level depending on:
Initial invested capital
Initial capital exposure level
Already made profit
To build a stable capital growth
for any business or investment

The model can be applied
In any start-up company
In any stable profitable business
In any capital investment
In any real-estate investment
In gambling money management
Generally, in any risk involved activity

Model hypotheses
Implementation phase
Maturity phase
With an initial invested capital C,
a constant risk level rwill be used
until a profit level pwill be obtained
according to the initial business plan.
(taken risk) (profit obtained)
1 2
1
2

Logarithmic Risk Distribution
After each time period (i), the capital:
and the risk level can be expressed as:
Convention:
The risk levels in (10) correspond to an exponential capital grow:

Conclusions
Logarithmic Risk Distribution is simple
Can be computed by anyone with small resources
Can be automated in real-time
capital management software
The risk is increased gradually avoiding large losses
The model is adapted to take into consideration any losses
in any time interval and to assist the recovery process
Can be used practically in any risk-involved activity

Logarithmic Risk Distribution.
Cristian Păuna
Email: cristian.pauna@ie.ase.ro
Economic Informatics Doctoral School
Academy of Economic Studies, Bucharest, Romania
This paper was financed by Algorithm Invest (algoinvest.biz)