Consider a portfolio of two assets. Asset A has an expected return of µ_{A} and a variance in returns of σ^{2}_{A}, whereas asset B has an expected return of µ_{B} and a variance in returns of σ^{2}_{B}. The correlation in returns between the two assets, which measures how the assets move together, is ρ_{AB}. The expected returns and variance of a two-asset portfolio can be written as a function of these inputs and the proportion of the portfolio going to each asset.

µ

_{portfolio}= w_{A}µ_{A}+ (1 − w_{A}) µ_{B}σ

^{2}_{portfolio}= w_{A}^{2}σ^{2}_{A}+ (1 − w_{A})^{2}σ^{2}_{B}+ 2 w_{A}w_{B}ρ_{AB}σ_{A}σ_{B}

where

w

_{A}= Proportion of the portfolio in asset A

The last term in the variance formulation is sometimes written in terms of the covariance in returns between ...

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