Indicator Overview

The Portfolio Diversification model is a high-level risk management tool designed to expose the "Illusion of Diversification". Most investors believe that owning multiple assets makes them safe; however, if those assets all move in lockstep, the portfolio remains highly vulnerable to systemic crashes.

This tool uses the Pearson Correlation Coefficient to analyse the daily price action of up to 10 assets, identifying hidden risk clusters and providing an objective Diversification Score.

The tool features a colour-coded matrix where Green indicates assets that move together, and Deep Red indicates assets that move in opposition. The goal for a professional-grade portfolio is to find "uncorrelated alpha", wits assets that remain stable or rise when others fall.

How To Use

This tool should be used as the final stress test whenever you consider adding a new asset to your portfolio.

• Understanding the Diversification Score:

1. 75% – 100% (High Diversification): Your portfolio consists of truly independent assets. You have successfully lowered your volatility floor.

2. 40% – 74% (Moderate Diversification): Typical of a growth-heavy portfolio. You have some protection, but major market swings will still impact most of your holdings.

3. 0% – 39% (Low Diversification): Your assets are redundant. You are essentially tripling down on a single trade. A crash in one will likely lead to a crash in all.

• Reading the Heatmap: Look at the intersections of your assets. If you see a bright green square between BTC and NVDA, it tells you that Tech and Crypto are currently trading as the same "Risk-On" bet. If you see a dark or red square between BTC and GLD (Gold), you have found a functional hedge.

• The Audit Process: Input your tickers separated by commas (e.g., BTC, ETH, SOL, NVDA, TSLA, GLD). Click "Audit Portfolio" to generate the matrix. If your score is too low, try replacing one of your high-correlation assets with a different asset class and watch the score improve.