Diversification below weighted risk but above the safer asset

Hold the inputs fixed

Use weights 40/60, standard deviations 20%/10% and correlation 0.3. The covariance calculation gives portfolio standard deviation approximately 11.349009%. Do not change weights halfway through the comparison.

Calculate the weighted baseline

The weighted average of standalone standard deviations is 0.4×20%+0.6×10%=14%. Subtracting portfolio dispersion gives approximately 2.650991 percentage points. This is a difference on the volatility scale, not variance and not a realised return.

Compare the lower-dispersion asset

Name the limited conclusion

Both statements are consistent: the covariance model reduces dispersion relative to weighted standalone risk, while this allocation remains riskier than Asset B alone on that measure. Neither comparison determines a suitable allocation because returns, preferences and other risks are absent.