This is a simple tool for visualizing the risk-return tradeoffs of a diversified portfolio holding two risky invesments in various quantities.

You can drag around each of the risky assets ● ● in risk-return space and see how that changes the risk/return tradeoffs achievable by holding all weighted combinations of the assets (the line joining these two dots).

The point ● shows the weighted combination of assets with maximum Sharpe ratio (i.e. the ratio of the excess return above the risk free rate and the risk). The straight line through this point shows risk/return tradeoffs achievable by leveraging or deleveraging this optimal portfolio. All portfolios on this line have the same Sharpe ratio.

Changing the risk-free rate ● lowers or raises the cost of leverage.

See also the capital asset pricing model.

Asset Correlation:

Asset | Risk | Return | Sharpe Ratio |
---|---|---|---|

● Risk-free | 0 | ||

● Asset 1 | |||

● Asset 2 | |||

● Optimal Unleveraged Portfolio |

The optimal unleveraged portfolio contains units of Asset 1 and units of Asset 2.

Made by Max Bolingbroke [GitHub] [Blog]. Released under a BSD3 license.