It’s a model for determining the position sizing of equity using a simple formula.
P (Position Sizing) = Number of units (Quantity) we’re going to buy.
C (Cash) = The amount of equity we’re going to risk in a single trade
R (Risk) = The amount we’re going to risk per unit of purchase.
We are going to buy a $100 stock with a risk of $10 per share. We are allowed to risk a maximum of 2% of our $10000 portfolio. We need to find the maximum number of shares to purchase according to the CPR Model.
According to the above formula,
P = C/R
C = 2 * 10000/100 = 200
R = 10
P = 200/10 = 20
Hence, We’re allowed to purchase a maximum of 20 shares to maintain a maximum risk of 2℅ of our $10000 portfolio.