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Portfolio Modeling (Markowitz)

Analyze the return and risk of a two-asset portfolio.

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About the "Portfolio Modeling (Markowitz)" Calculator

Modern portfolio theory, pioneered by Harry Markowitz, is a cornerstone of finance. This tool allows you to model a simple two-asset portfolio to understand the fundamental concepts of return, risk, and diversification.

By entering the expected return, volatility (risk), and weight of each asset, as well as the correlation between them, you can calculate the overall return and risk of your portfolio. This is an essential exercise for any investor wishing to build an optimized portfolio.

Key Concepts:

  • Expected Return: The weighted average of the individual assets' returns.
  • Volatility (Risk): A measure of the fluctuation of portfolio returns. It depends not only on the risk of each asset but also on how they move together (correlation).
  • Diversification: The principle that combining assets with low correlation can reduce the overall portfolio risk without sacrificing return.

Formula Used

σp=wA2σA2+wB2σB2+2wAwBρABσAσB\sigma_p = \sqrt{w_A^2\sigma_A^2 + w_B^2\sigma_B^2 + 2w_A w_B \rho_{AB} \sigma_A \sigma_B}
  • \sigma_p=Portfolio volatility (risk)
  • w_A, w_B=Weights of assets A and B
  • \sigma_A, \sigma_B=Volatility of assets A and B
  • \rho_{AB}=Correlation between assets A and B

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