ANALYSISM27

Portfolio Construction and Diversification

Build a portfolio using correlation, covariance, and the power of diversification to reduce risk without sacrificing return.

Learning Goals

  • Understand correlation and covariance mathematically.
  • Build a diversified portfolio across asset classes and sectors.
  • Use modern portfolio ideas for realistic Indian allocations.

Core Concepts

Correlation vs Covariance
Beginner

Correlation measures how assets move together. Covariance is the raw measure before scaling. Negative correlation is the most valuable for diversification.

Diversification Benefits
Beginner

Combining uncorrelated assets can lower portfolio volatility more than the weighted average of individual volatilities.

Concentration Risk
Beginner

Overweighting one sector or stock increases idiosyncratic risk. A well-diversified portfolio minimizes single-position shocks.

Indian Market Context

Indian investors often have household risk concentrated in property and bank stocks; adding global assets and debt can improve diversification.

Hands-On Calculators

Future Value Calculator
Future Value₹3,10,585

Gain: ₹2,10,585

Behavioral Insight

🧠 NARROW FRAMING: Investors treat each investment separately instead of assessing the portfolio as a whole.

From History

Portfolio Construction and Diversification

During the 2008 crisis, diversified portfolios saw smaller drawdowns than concentrated equity portfolios.

Take the Quiz

Module Quiz
Negative correlation between assets means:
A diversified portfolio can reduce risk without lowering expected return.
What is concentration risk?