Video: Man AHL Explains Portfolio Diversification

Man AHL created the AHL Explains video series in an effort to demystify quantitative investing through an engaging and user-friendly medium. The videos seek to bring essential quantitative investing concepts to life through illustrations and graphics, and explain the key concepts in futures trend following in a simple and accessible way.

Portfolio diversification involves determining the risk and potential returns individual investments bring to the portfolio, and how those risk/return attributes correlate with one another. It can quickly get complicated, but in this video, Man AHL explains the concept through the simple example of two portfolio assets named “A” and “B.” If “A” and “B” each contribute 1 unit of risk to the portfolio with the expectation of 0.1 units of return, then each has a Sharpe ratio of 0.1 (0.1 / 1 = 1). But if the two assets aren’t perfectly correlated, then splitting a portfolio between them would result in less risk for the same level of return, or more return for the same level of risk.

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