Equity-led drawdown

An equity shock with no automatic bond rescue

The distinguishing assumption is not just the equity decline. Government yields rise and credit spreads widen at the same time, denying the portfolio a presumed flight-to-quality offset. These are deliberately combined hypothetical inputs, not observations from a named crash or a statement about their likelihood.

Read the position contributions before judging diversification. An equity-led narrative does not mean every dollar lost is an equity loss. The frozen portfolio contains two bond sleeves with different sensitivities, while its cash reserve contributes no modeled local price change. Their labels alone do not establish protection.

Locate concentration in value times beta

Equity response is starting value multiplied by a fixed beta and the broad equity shock. Under the assumed 30% decline, beta 1.5 produces a 45% local loss. That is a mechanical illustration, not an estimate that an individual company will track this relationship during distress.

The engine accepts beta from zero to three and equity shocks from minus 60% to plus 60%; combinations producing a local loss of 100% or more are rejected. These are input boundaries, not empirical confidence bounds. Fixed beta cannot describe options, short positions, issuer failures or changing downside sensitivity.

Separate the two bond loss channels

Government-rate duration creates a loss when yields rise, while spread duration creates another loss when credit compensation widens. The corporate sleeve therefore faces both channels. The SEC's corporate-bond bulletin distinguishes interest-rate, credit and liquidity risks [2]; a single bond allocation percentage does not distinguish those exposures.

Duration, convexity and spread duration remain fixed throughout the calculation. Convexity supplies a positive second-order adjustment to the government-rate term only; it does not cushion spreads or guarantee an accurate bond valuation. There is no spread convexity, rate-spread cross term, yield-curve twist or changing call behavior.

A currency gain need not rescue a foreign holding

The yen assumption is positive even though equities decline. For a hypothetical yen-denominated equity holding at beta one, a 30% local loss and 3% currency gain combine to a 27.9% USD loss: 0.70 times 1.03 minus one. The currency helps without reversing the equity damage.

EUR and GBP translation instead deepen local losses in this preset. FX applies only to a holding's supported non-USD denomination, after its local return; the default USD portfolio has no translation effect. Corporate revenues, currency hedges and mixed-currency fund constituents are not inferred from a holding's name.

Challenge overlapping exposure before changing weights

FINRA's concentration guidance highlights overlapping funds and correlated holdings [1]. Here, inspect repeated issuers, sectors and market exposure behind separate rows. Splitting one stock allocation into several labels does not reduce its summed beta exposure. Conversely, a low reported beta does not establish that issuer-specific risk is small.

A useful follow-up holds the market assumptions fixed while challenging one exposure estimate at a time. Record which input changes the loss conclusion, then evaluate unsupported instruments separately. The result remains a static price sensitivity: dividends, trading costs, forced sales and the timing of cash needs are outside this calculation.

Review checkpoints

• Compare equity value times beta, not just the number of stock holdings.
• Rising government yields and wider spreads can make both bond sleeves lose alongside equities.
• Treat currency offsets as compounded translation effects, not guaranteed hedges.

Source notes

1. FINRA: Concentrate on Concentration Risk
2. SEC Investor.gov: What Are Corporate Bonds?

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