What does the number in the middle represent in the asset interaction?

The asset interaction number is used to answer the question, “How do you know a portfolio is diversified?” Specifically, how do the assets in a portfolio as a whole move (i.e., together or do they offset each other) during the stress of a down market. We look at the performance of a portfolio during a draw-down analysis and determine if the portfolio is focused, diversified, or hedged.

  • Focused

If the number is between 0-16, meaning 16% or less of the risk in the portfolio is diversified away we would consider that a focused portfolio.

  • Diversified

If the number is between 16-60, the percentage of risk diversified away, we would consider that a diversified portfolio.

  • Hedged

The number above 60, meaning 60% or more, we would consider that a hedged portfolio.

Understanding this will enable us to reduce risk under these conditions. We use real risk matrices based on down market scenario as opposed to the correlation matrices based on the makeup of the accounts in "all time" scenario.