Disclaimer: Am a software engineer by training, diving into finance. Am still a noob xD
Hey team, I have been reading one of Spitznagel's whitepapers:
Here, Spitznagel explains how adding an asset that has 0% overall return, when combined with another asset, can produce better results than just holding the other asset itself.
i.e: holding 100% SPY performs worse then 97% SPY 3% insurance, even though insurance has a neutral return by itself.
I can understand this intuitively: the insurance offsets large drawdowns in capital, which helps the compound growth.
But I don't know how I could think about this mathematically. I would guess it's even possible for the asset to have a negative return, and this would still work.
How could I model this? What are the variables at play, and how do they come together to determine the overall capital growth? Any beginning pieces of intuition I can start with, or textbooks to look into?