Reading Portfolio Risk Through Standard Deviation
In investing, volatility (standard deviation) measures how far returns swing away from their average, making it one of the most common gauges of risk. When you combine multiple assets into a portfolio, the total volatility isn't just a simple average of the individual assets' volatility. You also need the correlation between the assets — how closely they move together — to work out the portfolio's true risk.
This calculator takes the weight and annual volatility of Asset A and Asset B, along with the correlation between them, and applies the standard diversification formula (σp = √(w₁²σ₁² + w₂²σ₂² + 2w₁w₂ρσ₁σ₂)) to compute the portfolio's overall volatility. It also shows the simple weighted-average volatility that ignores correlation, so you can see in numbers exactly how much risk diversification actually removed. The lower the correlation and the better balanced the weights, the larger this reduction tends to be.
This calculator's results are estimates based on historical statistics or assumptions you provide. Since real-world correlation and volatility shift with market conditions, it's a good habit to update your inputs regularly and re-check your portfolio's risk profile.
Frequently Asked Questions
When the correlation between two assets is below 1, one asset tends to cushion losses in the other, so the combined volatility comes out lower than the weighted average of the two — this is the diversification effect.
If you don't have an exact figure, you can estimate conservatively — around 0 to 0.3 for very different asset classes like stocks and bonds, and 0.6 to 0.9 for stocks within the same sector.
No. Volatility measures risk, not return. A portfolio with low volatility but also low expected return may not fit your goals, so weigh it together with expected returns.