One Cloud Over Every River - diversification, correlation and Markowitz

The board draws rivers that each swing 20% a year and move together 30% of the way: one river swings 20%, ten swing about 12%, and no number of rivers gets below a floor of about 10.95%. This lesson tells the story of the man who first wrote that down, and why the floor is there.

Before you start. From A Day That Should Never Have Happened - volatility, the bell curve and fat tails you need volatility: the typical size of a return’s swing, measured as a standard deviation. A volatility of 20% a year means a typical year lands within about 20% either side of its average. Nothing else is assumed; the one new piece of arithmetic is shown working before it gets a name.