Thanks for reading this. I will explain to you in a simple way. This is for investors not for day traders.
See this illustration: A user has 3 Large cap scrips in his/her account
- Scrip1 Units: 10 closing price: 550 Holding value : 5500
2 scrip2 units 10 closing price : 300 Holding value : 3000
3 Scrip3 units: 10 closing price:150 Holding value :1500
Assume it is from Large cap, total number of scrips held by user = 3, from the table given for 3 scrips - p1=0.2916 (29.15%), p2=(0.02 or 2%)
If market would correct, User has chance that 1 scrip ( anything p>=0.05 at 95% confidence level) will be a black sheep
(don’t assume that fundamentals are good-even Lehman brothers and Jet Airways were excellent scrips 15 minutes before crash happened)
Hence we don’t have any bias here about scrip quality-Every investor would always assume all scrips he selected are fantastic!
But these probabilities are evidence generated from nse historical data for large cap scrips.
It means highest holding scrip1 if it becomes black sheep, User would lose 95% of its value from peak value. Say for scrip1 it is 50 Rs after correction user will lose 5000 Rs in Scrip1! This is what user has to foresee after correction!
It means user with 3 scrips there is 24% chance his 1 scrip gets grounded and 95% chance his 2 scrips survives.
This is the essence of diversification and balancing portfolio! It becomes a survival game when market corrects!
Compare this with user having 8 scrips: This user has 38.7 % chance his 1 scrip gets grounded, + 14% chance his second scrip gets grounded, He has 95% chance that 6 out of 8 scrips will survive.
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