Aswath Damodaran 71
The variance of a portfolio...
Figure 3.6: Standard Deviation of Portfolio
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
100% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
Proportion invested in Disney
Standard deviation of portfolio
As you combine Disney and Aracruz in a portfolio, the variance declines
(because the correlation between the stocks is low) and is actually minimized at
about 70% Disney, 30% Aracruz...
The gains would have been even stronger if the correlation had been zero... or
negative.... Even when two stocks move together though (the correlation is
positive but not one), there will be gains from diversification.
