Combine two assets into a portfolio and see the diversification benefit in action: how correlation between them shapes portfolio risk, return, and risk adjusted performance.
The Sharpe ratio measures how much return a portfolio earns above the risk free rate, per unit of risk taken, calculated as the portfolio's return minus the risk free rate, divided by the portfolio's standard deviation. A higher Sharpe ratio means better risk adjusted performance, not just higher raw return. This calculator combines two assets into a single portfolio using their individual returns, standard deviations, your chosen weighting, and the correlation between them, since correlation is what determines how much diversification actually reduces risk. Every slider on this page has a matching number field: drag to explore, or type exact figures if you already know your numbers.
If two assets are perfectly correlated, meaning they move in lockstep, combining them provides no risk reduction at all: portfolio risk is simply the weighted average of the two individual risks. As correlation falls below one, combining the assets starts to reduce portfolio risk below that weighted average, because their movements partially offset each other. At a correlation of negative one, it becomes mathematically possible to combine two risky assets into a portfolio with very little risk at all. This is the entire mathematical basis for the phrase "don't put all your eggs in one basket," and it only works because of imperfect correlation, not because of simply owning more things.
The chart above traces out every possible portfolio mix between 100% Asset B and 100% Asset A, at your chosen correlation. Lower correlation bends this curve further to the left, showing more risk reduction is available at every mix. The gold dot marks your current weighting, letting you see exactly where your chosen mix sits relative to every other possible combination.
Real portfolios usually hold more than two assets, and adding a third or fourth asset with its own correlations further changes the risk picture in ways a two asset model can't fully represent. This tool also assumes your inputs for expected return, standard deviation, and correlation are accurate and constant, when in reality all three are estimated from historical data and can shift meaningfully over time.
Sharpe ratio, portfolio variance, and the mathematics of diversification are foundational content on CFA Level 1 and are built on extensively in the portfolio management sections of CFA Level 2 and CAIA Level 1. Risk adjusted return measures also appear in the investment adviser content on the Series 65.
There's no universal cutoff, but as a rough guide, a Sharpe ratio below 1 is often considered subpar, between 1 and 2 is generally considered good, and above 2 is considered very good, though this varies by asset class and time period. Comparing Sharpe ratios is most meaningful between similar strategies over the same time frame.
Yes, when correlation is sufficiently negative. This is one of the more counterintuitive and powerful results in portfolio theory: combining two risky assets can produce a combined portfolio that is less risky than either asset held alone.
Historical correlation between two assets can be calculated from their past return data, and many financial data providers publish correlation matrices for common asset classes. Keep in mind that correlations are not stable over time and often rise during market stress, exactly when diversification benefits are needed most.
Yes. Each slider has a paired number input. Type directly into any gold field to enter a precise figure, and the slider along with all results update immediately.
Sharpe ratio and diversification math show up directly on CFA and CAIA exams. Practice for free.
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