Chapter 32 · Portfolio
Does holding BTC, ETH, and SOL together diversify your risk?
- Skills to practice
- Capital allocationControl losses
- 3D simulation
- Portfolio command center · Portfolio(planned)
Market scene
Lin divides $100,000 into BTC, ETH, and SOL at 30% each, plus 10% cash. Quantities and names differ, but dollars invested are equal. He believes he is diversified.
This fictional 30-day market is relatively calm for 20 days, then switches to joint sharp declines for 10. Month-end equity is $90,653.72; peak-to-later-trough drawdown reaches 16.01%. Which position dominates volatility?
Your decision
Choose how to examine these four allocations, then consider what it answers and misses.
Observe the result
The default buy-and-hold scenario is locked by seed 32, not historical data:
| Item | Value |
|---|---|
| Start | $100,000 |
| Day 1 close | $99,133.30 |
| Day 21 close | $93,827.23 |
| Day 30 close | $90,653.72 |
| Maximum closing drawdown | 16.01% |
The 9,346.28 loss from inception is not the largest decline along the path: the portfolio previously reached a higher level.
The mechanism
Defaults allocate 30% to each risky asset and 10% to cash, with no rebalancing. Daily changes use three random shocks from the same seed. Normal and crisis regimes specify mean returns, amplitudes, and co-movement separately.
- Each asset's volatility
- How assets move together
- Amount invested in each asset
- Combined fluctuations of the whole account
Changing only co-movement isolates its effect. The full crisis also changes means and volatility, so default losses cannot all be attributed to correlation.
At initial target weights, model-implied daily volatility is 2.15% normally and 5.65% in the full crisis. These describe distributional risk, not realized volatility measured from the 30-day path. Buy-and-hold weights drift, changing risk each day.
Cash earns no interest here; initial allocation is free and terminal liquidation is not forced. Rebalancing charges 10 bps on each intervening token trade, without charging cash movements twice. The model compares mechanisms and recommends no weights.
What it is called
Real markets
Chapter 18 illustrates shared-pressure selling. This page asserts no particular historical correlation; investigate whether positions depend on the same cash-needing participants.
Revisit the Chapter 16 case: price portfolios and custody/venue concentration need separate tables. Lower price correlation cannot eliminate shared venue unavailability.
Chapter 17 compares spot, dated futures, and perpetuals. They may share direction but differ in financing and maturity rules. Check genuinely independent risks before counting products.
Hands-on
30 synthetic days for BTC, ETH, SOL, and cash; seed 32. The first three equally split non-cash capital. The correlation-only comparison preserves drift, volatility, and random drivers; the full crisis changes them together.
Course versionV1-docs; sourcep4:portfolio；Chapter 32 / TRD-PRO-002
Records parameters and results at the click only; does not mean the experiment passed.View snapshot to save
| Asset | Capital weight | Share of risk contribution |
|---|---|---|
| BTC | 30.0% | 19.78% |
| ETH | 30.0% | 29.86% |
| SOL | 30.0% | 50.37% |
| CASH | 10.0% | 0.00% |
Daily equity data
| Day | Equity (USD) | Drawdown |
|---|---|---|
| 1 | 99,133.30 | 0.87% |
| 2 | 101,373.87 | 0.00% |
| 3 | 100,464.37 | 0.90% |
| 4 | 98,748.45 | 2.59% |
| 5 | 98,218.89 | 3.11% |
| 6 | 98,891.14 | 2.45% |
| 7 | 98,537.94 | 2.80% |
| 8 | 99,384.16 | 1.96% |
| 9 | 98,324.89 | 3.01% |
| 10 | 97,438.68 | 3.88% |
| 11 | 97,788.94 | 3.54% |
| 12 | 94,855.16 | 6.43% |
| 13 | 93,495.20 | 7.77% |
| 14 | 90,840.64 | 10.39% |
| 15 | 91,399.51 | 9.84% |
| 16 | 91,205.35 | 10.03% |
| 17 | 90,629.67 | 10.60% |
| 18 | 87,572.95 | 13.61% |
| 19 | 86,701.84 | 14.47% |
| 20 | 88,712.35 | 12.49% |
| 21 | 93,827.23 | 7.44% |
| 22 | 95,283.82 | 6.01% |
| 23 | 98,612.04 | 2.72% |
| 24 | 96,423.90 | 4.88% |
| 25 | 90,009.88 | 11.21% |
| 26 | 85,140.28 | 16.01% |
| 27 | 86,009.15 | 15.16% |
| 28 | 91,418.59 | 9.82% |
| 29 | 88,507.28 | 12.69% |
| 30 | 90,653.72 | 10.57% |
Cash earns no interest. Unleveraged spot; buy-and-hold weights drift. Interim rebalancing costs 10 bps one-way. Initial allocation and final liquidation are neither charged nor executed. The model has no predictive ability.
- Keep defaults and verify month-end equity, drawdown, and SOL's risk contribution.
- Select “Keep normal regime,” then “Increase correlation only.” Hold cash and rebalancing constant; record differences.
- Restore the full crisis and change either cash or rebalancing frequency alone. Explain cost and weight-drift effects.
- Write a portfolio note: dominant risk sources, budget adjustments under stress, and omitted risks.
Change one variable
Three depths
- FoundationDoes holding BTC, ETH, and SOL diversify risk?Chapter 32
- AdvancedHow do Risk Contribution, Risk Parity, and correlation matrices guide allocation?Advanced D · Portfolio and risk
- InstitutionalHow should multi-strategy portfolios allocate capital and risk budgets?Institutional
- 3DManage BTC, ETH, SOL, and cash. Random macro, volatility, and correlation changes show normally low-correlated assets falling together in crises.Portfolio command center
List amounts, then shared risks. Even equal capital across tokens requires inspecting unequal volatility contributions. Preserve stress tests rather than treating calm-period relationships as permanent.
A correlation matrix must be symmetric, have unit diagonal, and be positive semidefinite to define a consistent joint distribution. This model retains valid perfect-correlation and perfect-anticorrelation boundaries. Risk Parity targets risk contributions rather than equal capital, but depends on windows, volatility models, and trading constraints; see Advanced D.
Continue the project: recalculate correlation matrices and risk parity.
Multi-strategy allocation includes shared factors, venue capacity, liquidity, and tails. Budgets must meet capital, risk-contribution, and stress-loss limits together. Use advance de-risking rules when estimates fail; recent profit alone does not justify larger weights.
Continue the project: approve multi-strategy capital and risk limits.
Questions to take away
Chapter self-test
Its volatility and co-movement with other holdings affect contribution, not invested dollars alone.
No. The full crisis changes drift, volatility, and correlation. Use the correlation-only comparison.
Drawdown uses a previous peak; month-end return uses initial capital. The benchmarks differ.
It controls weight drift but incurs costs. Different paths can improve or worsen results; actual execution and liquidity constraints remain unmodeled.
One idea to take away
Portfolio risk depends on correlations. Assets with low normal correlations often fall together in crises.
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