MARKET ACADEMY
Connect risk, diversification, position size and attribution.
Connect risk, diversification, position size and attribution.
Diversification depends on economic exposures and correlations, not simply the number of ticker symbols. Ten technology stocks can share the same rate and earnings risks. A bond fund and a growth-stock fund may both suffer when real yields rise. Define the investment horizon, base currency, liquidity needs and acceptable losses before comparing assets. Leverage can magnify losses and trigger forced liquidation before a thesis has time to work.
For beginning-of-period weights without interim trades, portfolio return is the weighted sum of component total returns in a consistent currency. Contribution identifies what drove the result. A large gain in a tiny position can contribute less than a small loss in a large position. Rebalancing restores desired exposures but has costs and potential tax consequences. Historical volatility and correlations are estimates that may change.
A useful thesis specifies a mechanism, evidence, catalyst, valuation assumption and what would prove it wrong. Separate price movement from evidence about the business. A good outcome can come from poor reasoning and a loss can occur despite a sensible probabilistic process. Review both. In the Investing Lab, use simulated positions to test arithmetic and decision discipline before judging skill from a handful of outcomes.
Portfolio return = Σ(weight × component return); illustrative position weight = risk budget / loss scenarioIllustration: 60% in equities returning +8%, 40% in bonds returning −3% gives 0.60×8% + 0.40×(−3%) = +3.6%. A 10% position losing 20% contributes roughly −2 percentage points to the portfolio before other changes.