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Inspect a perfectly opposed example
Use weights 40/60, dispersions 20%/10% and correlation −1. Weighted exposures are 8% and 6%, giving total model volatility 2%. The terms partly offset.
Read the signed components
Weighted volatility contributions are +8 and −6 percentage points, which sum to 2. Asset B’s negative contribution is a covariance-based hedge effect within the model; its capital weight remains positive 60%.
| Asset | Capital weight | Volatility contribution |
|---|---|---|
| A | 40% | +8 percentage points |
| B | 60% | −6 percentage points |
| Total | 100% | 2% model volatility |
Keep the signs in the reconciliation
Taking absolute values would report 14 instead of 2 and remove the offset. A pie chart restricted to positive shares would not represent this decomposition accurately.
Retain the perfect-correlation assumption
The example assumes exact −1 correlation and supplied same-period dispersions. It does not claim a real hedge will preserve those inputs or eliminate other risks.