Two-Asset Diversification & Efficient Frontier

Asset A

Expected return μ_A 8%

Risk (volatility) σ_A 15%

Asset B

Expected return μ_B 6%

Risk (volatility) σ_B 10%

Correlation

Correlation ρ (A, B) 0.20

Portfolio Mix

Weight in Asset A 50%

Selected Mix Readout

Portfolio return μ_P

–

Portfolio risk σ_P

–

Asset A risk alone

–

Asset B risk alone

–

Diversification effect

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The curve traces every mix from 100% B (left end) to 100% A (right end). At ρ = +1 it is a straight line — no benefit. As ρ falls toward -1, the curve bows further left: portfolio risk drops below the simple weighted average, and can even drop below both individual assets' own risk.

Risk–return space — every possible A/B mix (0% → 100%)

Portfolio curve (ρ) 100% Asset A 100% Asset B Selected mix