Portfolio Heat Calculator

How it works

What this calculator does

Portfolio heat is the total account risk sitting in open positions if every stop is hit. The naive version simply adds the risk percentages. The adjusted version applies one correlation assumption so you can see how concentration changes the combined risk estimate.

The formulas

total heat = Σ risk_i

variance = (1 − ρ) × Σ risk_i² + ρ × (Σ risk_i)²

combined estimate = sqrt(variance)

diversification multiplier = total heat / combined estimate

The combined estimate treats each stop-risk as a 1σ shock. When ρ = 1, every position moves together and combined risk equals total heat. When ρ = 0, independent risks diversify in the square-root sense.

Worked example

For three open positions risking 1%, 1% and 2%, naive total heat is 4%. If correlation is 1.0, the adjusted estimate is still 4%. If correlation is 0.0, the estimate falls to about 2.45%, because the model treats the stop shocks as independent.

What it deliberately does not do

It uses one uniform correlation input, not a full covariance matrix. It also assumes the stop-risk numbers are accurate and comparable across positions. Gaps, liquidity and shared catalysts can make realized portfolio losses worse than a simple model estimate.