Correlation and Portfolio Exposure

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•Understand how correlated positions can concentrate risk in your portfolio.
•Category: impact
•Uses 1 tool(s) for analysis

Understand how correlated positions can concentrate risk in your portfolio.

Portfolio Impact Analysis

Every trade affects your overall portfolio metrics: risk, returns, diversification, and correlation. Understanding this impact helps you make better allocation decisions.

Before adding a position, model how it will change your portfolio beta, volatility, sector concentration, and expected returns.

Key Metrics to Track

Portfolio beta: Adding high-beta stocks increases overall market sensitivity.

Correlation: Adding correlated positions concentrates risk, even if you diversify by number of stocks.

Sector concentration: Too much in one sector creates single-point-of-failure risk.

Example: Adding a New Position

Portfolio: $100k with beta 1.0. Considering adding $10k of NVDA (beta 1.8).

1.Current portfolio beta: 1.0
2.New allocation: 10% NVDA, 90% existing
3.New portfolio beta: (0.9 × 1.0) + (0.1 × 1.8) = 0.9 + 0.18 = 1.08
4.Interpretation: Portfolio becomes 8% more volatile than before

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Key Concepts

Marginal Risk Contribution

How much a single position contributes to overall portfolio risk. High-beta positions in already-volatile portfolios contribute disproportionately.

Diversification Benefit

Adding uncorrelated positions reduces portfolio volatility. Measure this using correlation coefficients and portfolio variance.

Rebalancing Necessity

After large position gains, rebalancing may be needed to restore target allocations and prevent overconcentration.

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