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Portfolio Effect

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portfolio effect
A reduction in the variation of returns on a combination of assets compared with the average of the variations of the individual assets. This effect measures the extent to which variations in returns on a portion of assets held are partially canceled by variations in returns on other assets held in the same portfolio.
Portfolio Effect
The reduction in the value of a portfolio relative to the reduction in value of the individual assets represented in that portfolio. The portfolio effect is weighted for the percentage of the portfolio each asset represents. For example, suppose a portfolio consists of 50% of stock A and 25% each of stocks B and C. If stock A declines 10% and B and C each decline 20%, then the portfolio effect is calculated as:

portfolio effect = (.5(.1) + .25(.2) + .25(.2)) * 100 = 15% decline


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