Portfolio Construction & Risk
Diversification, position sizing, correlation, beta, and the math of risk
In March 2020, a portfolio of five 'diversified' technology stocks — Apple, Microsoft, Amazon, Google, and Meta — fell 30% in three weeks. A portfolio of five stocks spread across technology, utilities, healthcare, gold miners, and Treasury bonds fell 8% over the same period. Both portfolios held five stocks.
Both investors believed they were 'diversified.' The difference was not the number of holdings — it was the correlation between them. The five tech stocks had correlations of 0.
7-0.9 with each other — when one fell, they all fell, because they shared the same risk factors (consumer spending, ad revenue, rate sensitivity). The diversified portfolio held assets with correlations near zero or negative — when tech fell, Treasury bonds rallied, gold held, and utilities declined less.
The number of positions in your portfolio is a vanity metric. The correlation structure is what determines whether your portfolio will survive a stress event or collapse as a single concentrated bet in disguise.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 4 sections and ends with 5 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1The diversification equation — why correlation matters more than position count
- 2Measuring risk-adjusted performance — Sharpe and Sortino
- 3Risk metrics — what each measures and where each fails
- 4Where to see this on the platform