Solvency Cone

A “solvency cone” is a cone of shame that humans have to wear when they’ve overextended themselves financially.

Eh, okay. A real-life “solvency cone” is a mathematical model that takes transaction fees into account when determining how profitable an investment portfolio is likely to be.

To completely oversimplify, let’s say we think we can make a profit of $50 if we execute a series of eight trades. Sounds good, right? Except we pay $5 per trade, which means we’re really only making a profit of $10 overall. Less good. All we had to do was some simple math to see that our trade scheme isn’t as much of a money-maker as we thought it was.

What if we were to take our oversimplified example, multiply it by a whole bunch of accounts, trade amounts, trade fees, etc., and use calculations that are about a zillion times more complex? That’s what solvency cones do. They give investors realistic models of investment returns, based not on what all the fund managers and big-time institutional investors are doing, but on real trades that come with real transaction fees.