Independent bets
How many genuinely separate positions you hold, once you account for them moving together.
In the demo portfolio
1.05 of 4
How it is computed here
The portfolio is decomposed into its principal components — the independent directions inside the covariance matrix — and the entropy of how risk spreads across them is exponentiated.
Worked example
- The covariance matrix is split into independent directions of movement (its principal components), and the risk falling on each is measured.
- The exponential of the entropy of that split is the number of bets: equal risk on four directions gives 4; everything on one gives 1.
- 4 holdings behave like 1.05 independent bets: they mostly move together.
Demo portfolio: four invented companies, generated prices, measured by the real engine. Past returns do not predict future ones.
Where it misleads
Ten technology names give roughly 1.4. Counting holdings always overstates diversification; this is the figure that refuses to.