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Combining two assets (even individually risky) may provide an overall risk reduction. Play with these two imaginary assets and their return series and watch how the combined portfolio behaves.

Individual asset returnsConfigure and combine the assets to create a portfolio

Portfolio returnsThis is the result of mixing the assets in a portfolio (50% each)

A | B frequency:NANA

A | B phase:      NANA

A | B amplitude:NANA

Standard deviation A | B | A+B:N.A.N.A.N.A.

Correlation A vs. B:N.A.

Combining assets in the risk-return plane shows how correlations affect the feasible portfolios

Combination of 2 assetsThe correlation between asset returns determines the feasible combinations

Combination of 3 assetsThe correlations among asset returns determines the feasible combinations

Returns correlation coefficient:NA

Returns correlation coefficient:NA

Maximum weight per asset:NA

The subjective risk-aversion coefficient determines the combination of risky and non-risky positions in the overall optimum portfolio

Indifference curvesThese curves show the risk&return combinations that produce the same satisfaction

Asset allocationMaximize expected utility given an efficient risk&return frontier

Risk aversion coefficient:NA

Optimum level of utility, risk and return:N.A.N.A.N.A.

Sometimes, extreme scenarios are more likely than depicted by traditional statistical distributions. In particular, the Normal (Gaussian) distribution has thin/short tails.

Normal curvesThese curves show normal distributions with different Standard Deviations

Standard deviation distribution B (A=1):NA