When Every Model Agreed - tail risk, correlations going to one, and liquidity

The valley, where one cloud raining on many rivers at once is correlation, and the BORROWED BUCKET box warns that a margin call sells low. This lesson is the day both happened to the cleverest fund in the valley at once.

Before you start. From One Cloud Over Every River - diversification, correlation and Markowitz: mixing many bets cuts the swing, down to a floor set by how much they move together (their correlation). From Borrowed Water - leverage, margin calls and the growth-optimal bet: at L times leverage a fall of 1/L wipes you out, and a margin call forces you to sell at the bottom. From The Dial Nobody Can See - Black-Scholes and implied volatility: pricing models assume a bell curve, and real markets have fatter tails.