Explain the relation between risk and correlation among assets in a portfolio.

Risk depends on the correlation among assets in a portfolio.This can be seen by examining the formula for the standard deviation of a two-asset portfolio: Here,σ_XY is the covariance between X and Y.If the covariance is zero,the variance of the portfolio is simply a weighted sum of the individual variances.If the covariance is negative,the standard deviation of the portfolio is smaller,while if the covariance is positive,the standard deviation of the portfolio is larger.Thus,if two investments are positively correlated,the overall risk increases,for if the stock price of one falls,the other would generally fall also.However,if two investments are negatively correlated,when one increases,the other decreases,reducing the overall risk.This is why financial experts advise diversification.