Critical to the benefit of holding assets together in a portfolio is the concept of diversification. It is often said that risk in return move together, which means for an investor to earn greater levels of return they have to accept greater levels of risk or uncertainty or volatility of those returns.

However, the concept of diversification holds that risk can be reduced by holding assets together within a portfolio without necessarily giving up returns.

The extent to which diversification can be created within a portfolio is dependent on the relationship between the investments in that portfolio, which is often measured using correlation.

Highly positively correlate Investments such as assets A and B, which move together over time we'll experience little to no diversification benefits if these assets are combined into a portfolio such as the equally weighted portfolio demonstrated by the dotted line.

The volatility or variability in the value of the combined portfolio of A and B is no lower than that of asset A or B on its own.

However, looking at the diagram on the right hand side, the two Investments assets C and D are strongly negatively correlated since the Investments move in opposite directions to each other when one is up the other is down and vice versa.

however If these assets are combined into an equally weighted portfolio, the individual volatility of each asset offsets that of the other initially when assets C is doing badly I said D is doing well which offsets the poor performance of C. The result is that the overall variability or volatility of the combined portfolio's value is very low despite the volatility that exists in each asset individually, even though this extreme outcome may not be possible in the real world. It does at least demonstrate the idea that combining assets together in a portfolio can reduce overall portfolio risk.