Value investing · Course 37 of 39 · The practice
The arithmetic of a portfolio
Covariance by hand, the variance of two holdings, where diversification stops paying, what a drawdown costs to recover, Kelly, and the drag of trading and tax.
For a reader who has met diversification, position sizing and drawdowns as ideas and now wants the arithmetic under them. Every number in this course can be recomputed by hand from the figures on the page.
After this course you can compute a covariance and a correlation from a short return series, work out what two holdings do to a portfolio's variance and at what correlation the benefit disappears, show how the benefit decays as holdings are added and what happens when correlations rise, state which inputs a mean-variance model needs and how badly each is estimated, compute the gain a fall requires and the years it takes, apply the growth-optimal betting fraction and say why nobody uses it in full, and subtract trading costs and tax from a measured edge.
It assumes Portfolio construction and risk, which sets out the ideas this course computes, and it uses one real series of annual index returns from a published annual report.
The method, not the running of it
The arithmetic of a portfolio is 7 lessons on running the whole method on one company. Running it is the part that only happens against real filings, on a real date, and this course has none of yours. It also cannot tell you the day one of your reasons stops being true, which is the part that matters after you have bought.
See our methodology for how the product reads a filing and what it refuses to compute.