Portfolio Volatility

Portfolio volatility measures how much your portfolio's returns fluctuate — it's the standard deviation of returns. Unlike simply averaging individual asset volatilities, portfolio vol accounts for correlations: assets that don't move in lockstep reduce total risk. For example, a 50/50 portfolio of two 20%-vol assets with 0.3 correlation has ~16% vol, not 20%. This is the diversification benefit—the whole is less risky than the sum of parts. The formula σₚ = √(wᵀΣw) shows portfolio vol depends on weights (w), individual vols (Σ diagonal), and correlations (Σ off-diagonal). Lower correlation = better diversification. This is why global portfolios (stocks + bonds + alternatives) can achieve lower vol than stock-only portfolios.