Portfolio Volatility Calculator

What the portfolio volatility calculator does

The portfolio volatility calculator measures the overall risk of a portfolio built from two assets. It combines how much of your money sits in each asset, how volatile each is on its own, and how closely the two move together, and returns one annualised volatility figure for the blended portfolio.

Volatility, expressed as a standard deviation, is the most widely used measure of investment risk: a higher figure means wider ups and downs. Combining two risky assets does not simply average their risk. When the assets do not move in perfect step, the portfolio's volatility lands below the weighted average of the two, and the calculator shows by how much.

How two-asset volatility is calculated

Variance is volatility squared. For a two-asset portfolio it is the squared contribution of the first asset, plus the squared contribution of the second, plus a cross term scaled by the correlation coefficient, which grows when the assets move together and shrinks, or turns negative, when they move apart.

The portfolio variance is w1²σ1² + w2²σ2² + 2·w1·w2·σ1·σ2·ρ, where w is each asset's weight, σ is each asset's volatility, and ρ is the correlation between them. Taking the square root converts variance back into volatility.

The role of correlation

Correlation ranges from -1 to 1. At 1 the two assets move perfectly together, the portfolio volatility equals the weighted average, and there is no diversification benefit. At 0 they move independently, which already reduces combined risk. At -1 they move in exact opposition, and with the right weights the swings can cancel out entirely.

Real assets sit in between. Equities and high-quality government bonds have often shown low or negative correlation, which is why the classic stock-and-bond mix has historically been calmer than stocks alone. Two funds tracking the same index will be correlated close to 1 and offer almost no diversification. Try different correlation values to see how much this one number changes the result.

The three results

Portfolio volatility is the standard deviation of the combined portfolio. Weighted average volatility is each weight times its volatility, a benchmark that assumes no diversification. The diversification benefit is the difference: the percentage points of risk removed by blending assets that do not move in lockstep.

For the same weights, the expected return is unchanged while the swings are smaller, which is why diversification is often called the only free lunch in investing. The larger the gap between the weighted average and the portfolio volatility, the more your mix is doing for you.

Practical uses

If you hold a growth fund and a bond fund, enter each weight and volatility with a realistic correlation to see the risk of the combination. If you are deciding how much to shift from a volatile asset into a steadier one, adjust the weights and watch the portfolio volatility fall.

Correlations change. Two assets that look well diversified in calm markets can become highly correlated in a crisis, when everything sells off together. Raise the correlation toward 1 to see how much of your diversification benefit would disappear in that scenario.

Common mistakes

Assuming the weighted average is the real risk overstates the risk of a sensible portfolio, because it only holds when correlation equals 1. Treating a single historical correlation as permanent is another error; test a range instead. Volatility measures the size of swings in both directions, so it is a proxy for risk, not a direct forecast of how much you might lose.

Volatility also says nothing about expected return: two portfolios can share the same volatility yet offer very different rewards. Pair this tool with a return estimate for the full trade-off, and use it to compare a concentrated position with a blended one or to judge whether adding a lowly correlated asset would smooth your returns enough to be worthwhile.

This article is general information only and is not financial advice.

About This Portfolio Volatility Calculator

Use this portfolio volatility calculator to get an instant estimate based on the figures you enter. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.