Portfolio Diversification

Portfolio Parameters

Weight in Asset A (%)

50%

Asset A

Expected Return (%)

8.0%

Std Deviation (%)

12.0%

Asset B

Expected Return (%)

10.0%

Std Deviation (%)

15.0%

Correlation

Correlation Coefficient (rho)

0.50

Correlation of -1.0 = perfect negative (best diversification)
Correlation of 0 = independent
Correlation of +1.0 = perfect positive (no diversification benefit)

Key Insight: Lower correlation between assets means greater diversification benefits. When assets move together (high correlation), portfolio risk stays high. When they move independently, combining them reduces overall risk.

Portfolio Opportunity Set

Portfolio Return 9.0%

Portfolio Std Dev 12.5%

Asset A Weight 50%

Asset B Weight 50%

E(Rp) = w*E(RA) + (1-w)*E(RB)
sigma_p = sqrt(w^2*σA^2 + (1-w)^2*σB^2 + 2*w*(1-w)*σA*σB*ρ)

How to Use This Tool

Move the Weight in Asset A slider to see how changing portfolio weights affects risk and return. The Portfolio Opportunity Set curve shows all possible combinations of these two assets. Notice how correlation dramatically affects the shape of the curve and the location of the minimum variance portfolio.

The minimum variance portfolio (MVP) is the combination that produces the lowest overall risk. With low or negative correlation, you can often reduce risk below the risk of either individual asset.