A well-diversified portfolio reduces risk by holding assets that are negatively correlated (i.e., they move in opposite directions).
Why Negative Correlation?
When one asset class declines, the other may rise, reducing overall portfolio volatility.
Why Low Standard Deviation?
Lower standard deviation means less volatility, making the portfolio more stable.
Example:
Stocks and bonds typically have negative correlation—when stock prices fall, bond prices tend to rise.
???? Reference: Modern Portfolio Theory (Harry Markowitz), CFA Institute (Risk Diversification).
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