Sunday morning. Friend's question over chai. The Markowitz line that breaks every brain on first hearing.
"Why would I add gold to a 100 pct equity book if gold compounds slower." Asked myself the same question the first time I read Markowitz. The honest answer is the one nobody believes until they see the variance term broken apart. Adding a lower return asset can leave the portfolio better off, not because it added return, because it ate volatility on the way.
13.0pct
100 pct Equity . return
Single asset book. 13.0 pct expected return at 19.0 pct annualised vol. The whole ride lands on one shoulder. Every crisis takes the full hit.
VS
12.0pct
80 / 20 Eq Gold . return
Same equity book, twenty pct gold sleeve. Return falls 1.0 pp. Vol falls 3.1 pp to 15.9 pct. You gave up one rupee of return for three rupees of calm.
One pp of return surrendered. Three pp of volatility absorbed. The brochure number went down. The portfolio went up. That asymmetry has a name and a formula. Card two has the math. Card three has the rules.