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  1. 080A strategy trades 200 stocks, each with an average daily value traded of Rs 50 crore. It may take at most 5% of any day's volume in a stock, and it turns its book over 10 times a year across 250 trading days. Roughly how much capital can it run?Estimation and mental mathsHardMulti-manager platformsLong-short equity funds

    Try it first

    What is the capacity, to the nearest round number?

    Show the worked solution

    About Rs 12,500 crore. Each stock allows 5% of Rs 50 crore, Rs 2.5 crore a day. Across 200 stocks that is Rs 500 crore a day, and across 250 days Rs 1,25,000 crore a year. A book turned over 10 times a year needs 10 rupees of trading for every rupee of capital, so the book can be Rs 1,25,000 crore divided by 10. Treat it as a ceiling, not a working size.

    What does capacity actually mean?

    Picture a juice stall that can squeeze 500 glasses a day. How many regular customers can it serve? That depends on how often each one comes. If every regular drinks a glass a day, 500; if each comes once in ten days, 5,000. A strategy's capacity is the capital it can run before its own trading exceeds what the market will absorb, so it is tradable volume divided by how often the book must be traded.

    From one stock's daily volume to the capital the strategy can runRs 50 cra day, one stockx 5%Rs 2.5 cryou may take a dayx 200 stocksRs 500 crall 200 stocks, a dayx 250 daysRs 1,25,000 cra year, 250 days/ turnover 10Rs 12,500 crcapacitySame tradable volume, different turnover: capacity, Rs croreTurnover 2x a year62,500Turnover 5x a year25,000Turnover 10x a year12,500Turnover 20x a year6,250Turnover 50x a year2,500
    Rs 50 crore of daily value in one stock, at a 5% participation limit, across 200 stocks and 250 days, allows Rs 1,25,000 crore of trading a year, which supports a Rs 12,500 crore book at a turnover of 10; the same volume supports Rs 62,500 crore at 2x and only Rs 2,500 crore at 50x.

    How do you build the number out loud in the room?

    Go one multiplication at a time and say each one. 5% of Rs 50 crore is Rs 2.5 crore per stock per day. Two hundred stocks make Rs 500 crore a day. Two hundred and fifty days make Rs 1,25,000 crore a year. Dividing by a turnover of 10 gives Rs 12,500 crore, and the step people drop is the last one: capacity is not a day's or a year's volume.

    The relationship
    K=N×ADV×p×Dτ=200×50×0.05×25010=12,500K = \frac{N \times \text{ADV} \times p \times D}{\tau} = \frac{200 \times 50 \times 0.05 \times 250}{10} = 12{,}500
    Nnumber of stocks traded, 200
    ADVaverage daily value traded per stock, Rs 50 crore
    pthe most of a day's volume the strategy may take, 5%
    Dtrading days a year, 250
    tauturnover, how many times a year the book is traded, 10
    What it says in wordsCapacity is what the market lets you trade in a year, divided by how many times a year you need to trade your book.

    Why is turnover the lever that matters most?

    Every input enters in proportion, but the market and the risk team set the others, while the strategy itself sets its turnover, and turnover varies far more across strategies. A strategy that turns over 50 times a year has a capacity of Rs 2,500 crore on this universe; one that turns over twice a year has Rs 62,500 crore. That is why fast strategies close to new money early and slow ones can run large books.

    Why is the real capacity lower than this ceiling?

    The estimate assumes the strategy trades evenly every day and in every stock. It does not. Trades cluster when signals fire, which is often when others trade too, and the thinner names in the list hit the 5% limit long before the larger ones. The definition of turnover matters as well: if 10 times means buying 10 times the book and also selling it 10 times, the traded value doubles and capacity halves to Rs 6,250 crore. Say which definition you used, and add that trading costs rise before the hard limit, so returns fade well before the ceiling.

    Where candidates lose it

    The usual loss is stopping at Rs 500 crore a day or Rs 1,25,000 crore a year and calling that capacity. Both measure how much can be traded, not how much capital that trading can support, and the interviewer is waiting for the division by turnover.

    The second loss is presenting Rs 12,500 crore as an exact answer. It is a ceiling built on even trading and one definition of turnover; saying so is what makes the estimate believable.

    What the interviewer asks next

    • Half of the 200 names trade only Rs 10 crore a day. What is the capacity now?
    • How would you define turnover so the estimate is not off by a factor of two?
    • At what size would you expect returns to start fading, and why before the ceiling?