Combine two assets’ volatilities and their correlation to get portfolio volatility.
Portfolio volatility is below the weighted average of the components unless the assets are perfectly correlated. That gap is the diversification benefit, and it grows as correlation falls toward negative one. Diversification is the only way to reduce risk without reducing expected return, and correlation is the variable that determines how much of it you get.
Portfolio Volatility
σₚ = √(w²ₐσ²ₐ + w²ᵦσ²ᵦ + 2wₐwᵦσₐσᵦρ)
σₚ = √(w²ₐσ²ₐ + w²ᵦσ²ᵦ + 2wₐwᵦσₐσᵦρ) Portfolio volatility is below the weighted average of the components unless the assets are perfectly correlated. That gap is the diversification benefit, and it grows as correlation falls toward negative one.
Diversification is the only way to reduce risk without reducing expected return, and correlation is the variable that determines how much of it you get.
This calculator takes 4 inputs: Weight in asset A, Volatility of asset A, Volatility of asset B, Correlation between the assets. The pre-filled defaults are a realistic starting point — replace them with figures from your own environment for a result you can act on.