Why This Graph Matters

Imagine you're making a **cocktail**. Each stock is an **ingredient**. The way these ingredients mix together (correlation) determines whether your portfolio is **smooth and balanced** (low risk) or a **risky disaster** (high risk).

How Portfolio Return Works

Your portfolio’s return is the combined return of all stocks you choose, weighted by how much you invest in each one.

Why Correlation is Important

- **Low correlation** helps reduce risk, making your portfolio more stable. - **High correlation** increases risk, as all stocks move together. - **Negative correlation** provides the best diversification, balancing gains and losses.

How Correlation Affects Risk

Your portfolio's risk depends on three things: 1. The risk of each individual stock. 2. How much of each stock is included. 3. How the stocks move relative to each other (correlation).

The lower the correlation, the better the diversification and risk reduction.