Understanding Portfolio Risk and Correlation

This helps you understand how combining multiple stocks affects a portfolio's risk and return.

Key Takeaways:

• Expected Return is the weighted average of individual stock returns.
• Portfolio Risk depends on how stocks move relative to each other (correlation).
• Lower correlation between stocks reduces overall risk, making diversification more effective.

Why Correlation Matters:

• High correlation (stocks move together) → Little to no risk reduction.
• Moderate correlation (stocks move somewhat independently) Some diversification benefits.
• Low or negative correlation (stocks move in opposite directions) → The best risk reduction.

How Portfolio Risk is Calculated:

The total risk of a portfolio depends on three things:

• The risk of each individual stock.
• How much of each stock is included (the weight in the portfolio).
• How the stocks are related to each other (correlation).

A well-diversified portfolio with low or negative correlations will have lower overall risk than any single stock.

Try adjusting the correlation value to see how portfolio risk changes!