§ 01
A portfolio of 20 stocks in different sectors has less risk than 20 stocks in the same sector, even if each stock’s individual volatility is identical. Diversification reduces risk only when correlations are less than 1.0.
§ 02
| Risk Source | What It Captures | Can You Diversify It? |
|---|---|---|
| Market (systematic) | Broad market movements | No — affects all stocks |
| Sector | Industry-specific factors | Yes — diversify across sectors |
| Idiosyncratic | Company-specific events | Yes — add more holdings |
| Factor | Value, growth, size, momentum exposures | Only by balancing factor exposures |
§ 03
List your top 5 holdings. Are they in different sectors with different risk factors? Or are they all tech stocks that will move together in a downturn? True diversification requires uncorrelated risk sources.
§ 04
Your portfolio has 15 positions across ‘different’ stocks, but 12 are high-growth tech companies. Are you diversified?
§ 05
§ 06
A portfolio's total risk is 18%. Decomposition shows 10% from AAPL (one position, ~40% weight), 6% from market-beta, 4% from sector exposures, 2% noise. What's the biggest opportunity to reduce risk?
Five questions · AI feedback
Sit with the ideas.
A portfolio holds 20 stocks equally weighted at 5% each. Stock A has a beta of 2.1 and a correlation of 0.85 with the rest of the portfolio. Stock B has a beta of 0.7 and a correlation of 0.15 with the rest. Which stock contributes more to total portfolio risk?
Why: