Diversification Analyzer: Don't Put All Eggs in One Basket
Our Diversification Analyzer computes portfolio risk/return with correlations.
Key Benefits
- Lower volatility via low-correlation assets
- Efficient frontier visualization
- Weight optimization hints
Formulas
| Metric | Formula |
|---|---|
| Portfolio Return | Σ (w_i × r_i) |
| Portfolio Volatility | √[ΣΣ w_i w_j σ_i σ_j ρ_ij] |
Example: 3 Assets (Stock 12%/15%, Bond 5%/6%, Gold 8%/10%; Corrs 0.7/0.2/0.1)
- Equal Weights: Return 8.33%, Risk ~8.5% (vs ~10.3% average)
- Diversification Benefit: 17% risk reduction
Pro Tips
- Correlations <0.5 ideal
- Rebalance periodically
- Combine with Sharpe
Limitations
- Historical correlations
- No transaction costs
- Assumes normal returns
Conclusion
Build resilient portfolios with our Diversification Analyzer. Explore Finance tools.