Breadth portfolio management

Hello people can someone please explain me what does this sentence means “breadth can be higher than the number of securities if factors in the risk model suggest active returns are negatively correlated”. I understand breadth =no of independent uncorrelated decisions made.

thank you

Negatively correlation will require manager to make more numbers Of independent bets which otherwise would not be required, if there is zero or less than perfect correlation.

I’m not sure that that’s true.

I think that it’s more a matter of the authors having come up with a nice formula, then having to justify it under a variety of scenarios.

Just remember that when the average correlation of returns is negative, BR > number of securities, and when the average correlation of returns is positive, BR < number of securities.

S2000 magician sir what I really cannot understand is how breadth can be greater than no of securities. I understand breadth can be less than the no of securities for example if i say that auto stocks are a good bet in that case my breadth should be 1 which is lower than the no of securities in the auto sector. Can you help me in explaining how it is the other way?

Thank you for your help.

Chirantana the thing is my basics regarding breadth are not clear so i could not understand what you said.But still thank you so much for taking out time and replying.

Hello Bill,

Thanks for simplify the thing.

I was considering in a manner… (subjective to my understanding)

As it is mentioned “when fundamental law concepts are applied to hedging strategies using derivatives or other forms of arbitrage, breadth can increase well beyond the number of securities.”

What I had took from this statement , every drivative has two options of outcome :

  1. 0 or 2) some value X as per the postion

In that scenario manager has to take two bets for securing its future position from the 2 outcomes (50% chance of each) of 1 derivative.