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Portfolio Volatility Calculator

Combine two assets’ volatilities and their correlation to get portfolio volatility.

About Portfolio Volatility Calculator

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.

Formula

Portfolio Volatility

σₚ = √(w²ₐσ²ₐ + w²ᵦσ²ᵦ + 2wₐwᵦσₐσᵦρ)

ρ
Correlation between the two assets
w
Portfolio weight of each asset

Worked example

With the default values below, Portfolio Volatility Calculator returns Portfolio Volatility of 10.651%. Change any input above and every figure here is recalculated in your browser.

Inputs used

Weight in asset Aaccepts 0–100 %
60 %
Volatility of asset Aaccepts 0–100 %
16 %
Volatility of asset Baccepts 0–100 %
7 %
Correlation between the assetsaccepts -1–1
0.25

Results

Portfolio Volatility
10.651%
Weighted Average of the Volatilities
12.400%
Volatility Removed by Diversification
1.749%
Weight in Asset B
40.0%
Interpretation
Low correlation delivers a useful diversification benefit

Step by step

  1. 1Values used
  2. 2Portfolio Volatility
  3. 3Portfolio Volatility= 10.651
  4. 4Weighted Average of the Volatilities= 12.400
  5. 5Volatility Removed by Diversification= 1.749
  6. 6Weight in Asset B= 40.0
  7. 7Interpretation= Low correlation delivers a useful diversification benefit

Assumptions and limits

  • The result is derived only from the 4 inputs listed above. Anything not among them is not part of the calculation.
  • In particular, this calculator does not take inflation, tax, fees or charges or compounding frequency into account.
  • Figures are rounded for display to 3 decimal places, so totals built from several rounded parts can differ slightly from the unrounded arithmetic.
  • This is an estimate for general information and not professional financial, tax or legal advice. See the full disclaimer for the limits that apply to this kind of calculator.

How these calculators are built and tested is described on the Methodology page. If a figure looks wrong, please report it.

Frequently Asked Questions

How is Portfolio Volatility calculated?

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.

Why does Portfolio Volatility matter?

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.

What values do I need to enter?

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.

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