Efficient Frontier for a Portfolio of Two Assets

Premium

We learned that the calculation of risk for a portfolio of two assets is not straight forward as we also have to account for the covariance between the assets in the portfolio.

Depending on the correlation between the assets, the risk-return profile of the portfolio changes. Note that we can combine the two assets in varying proportions in the portfolio two arrive at an infinite number of portfolios. Say the two assets are A and B. You can start with a portfolio that has 100% money invested in Stock A, then create many portfolios with different proportions of A and B, and end with a portfolio that has 100% money invested in stock B.

Unlock Premium Content

Upgrade your account to access the full article, downloads, and exercises.

You'll get access to:

  • Access complete tutorials and examples
  • Download source code and resources
  • Follow along with practical exercises
  • Get in-depth explanations