BacktestFolio · Glossary
Diversification Ratio
In plain language
If the weighted average of your asset volatilities is 15% but the portfolio volatility is 10%, the Diversification Ratio is 1.5. It means the combination is 50% less risky than the sum of its parts — diversification is genuinely working.
Technical definition
Ratio of the weighted average of individual asset volatilities to the overall portfolio volatility. Values greater than 1 quantify the diversification benefit: the higher it is, the more the assets offset each other.