Heat Maps

Volatility Heat Maps

Below are our volatility heat maps taken from our signature bubble movie. Each of the bubbles represents an asset class (such as consumer staples, financials, etc.). The x-axis represents each asset class's correlation to the portfolio as a whole, and the y-axis represents the volatility of each of the asset classes.

In this portfolio, our asset classes are not highly correlated (hence why they are spread out) and have low volatility. This is an ideal portfolio in which we would be fully invested or nearly fully invested.

In this portfolio, our asset classes are not highly correlated (hence why they are spread out) and have low volatility. This is an ideal portfolio in which we would be fully invested or nearly fully invested.

Above is what happened in 2008. All of the asset classes became highly correlated, and the volatility of every asset class rose to extremely high levels. This is a portfolio in which we do NOT want to be invested. Our system would be completely out of the market right now and invested in cash.

Above is what happened in 2008. All of the asset classes became highly correlated, and the volatility of every asset class rose to extremely high levels. This is a portfolio in which we do NOT want to be invested. Our system would be completely out of the market right now and invested in cash.


Marginal Sharpe Heat Map

Below, is our Marginal Sharpe heat map. This diagram shows the impact of Marginal Sharpe on the risk-adjusted return of the portfolio. The black dot represents the portfolio as a whole, while the other dots represent asset classes within the portfolio.

Notice that any dots that are above the red portfolio line increase the risk-adjusted return of the portfolio, and any dots below the red portfolio line reduce the risk-adjusted return of the portfolio. An asset class does not necessarily need to have a higher Sharpe Ratio than the portfolio to increase the risk-adjusted return, but can increase the return if it uncorrelated enough with the portfolio.

Notice that any dots that are above the red portfolio line increase the risk-adjusted return of the portfolio, and any dots below the red portfolio line reduce the risk-adjusted return of the portfolio. An asset class does not necessarily need to have a higher Sharpe Ratio than the portfolio to increase the risk-adjusted return, but can increase the return if it uncorrelated enough with the portfolio.