Diversification
Whether a portfolio's holdings are genuinely different bets, not just many of them.
Inputs
- Effective holdings. 1 scores 0, 5 → 40, 12 → 70, 25 → 92.
- Sectors held. 1 → 5, 3 → 35, 5 → 60, 8 → 85, 11 → 95.
- Average pairwise correlation. 0 → 95, 0.25 → 78, 0.45 → 58, 0.65 → 32, 0.85 → 8.
- Largest sector. 15% → 92, 30% → 70, 45% → 45, 60% → 22, 80% → 5.
How to read it
Twenty technology stocks that move together are one bet held twenty times. Diversification counts sectors and correlations as well as positions.
How to use it
A quick check on whether the holdings are genuinely different bets.
Limitations
Sectors are a coarse classification, and correlations come from the days the holdings share.
In Kereon
Portfolio. A 0–100 score: the average of four banded readings — the effective number of holdings, how many sectors are held, the average pairwise correlation (lower scores higher) and the largest sector's share (smaller scores higher).
Also called: diversification, diversification score.