Investopedia explains 'Portfolio Variance'
Portfolio variance is calculated by multiplying the squared weight of each security by its corresponding variance and adding two times the weighted average weight multiplied by the covariance of all individual security pairs. Modern portfolio theory says that portfolio variance can be reduced by choosing asset classes with a low or negative correlation, such as stocks and bonds. This type of diversification is used to reduce risk.
Portfolio variance = (weight(1)^2*variance(1) + weight(2)^2*variance(2) + 2*weight(1)*weight(2)*covariance(1,2)
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