Research preview

The recent off‑hand remark about a restaurant’s steak being “very mid” offers a playful entry point to discuss a core concept in quantitative finance: the impact of correlation on portfolio risk. By treating each steak as an asset, we can illustrate how diversification works and why the relationship between assets matters far more than their individual volatilities. The Basics of Volatility and Correlation Volatility measures the spread of an asset’s returns around its average. In our example each of two assets has a 10 % annual volatility. Correlation quantifies how the returns of one asset move together with another, ranging from –1 (perfect inverse movement) to +1 (perfect co‑movement). When correlation...