Impact of Adding a Negatively Correlated Asset

Investors often use diversification as a key strategy in managing portfolio risk. By combining different assets, they aim to reduce the impact of any single asset's poor performance on the overall portfolio. However, the effectiveness of diversification depends on the correlation between the assets included in the portfolio.

Consider the following scenario: An investor is analyzing two assets, Asset X and Asset Y. Historical data indicates that Asset X has a return of 12% with a standard deviation of 20%, while Asset Y has a return of 8% with a standard deviation of 10%. The correlation coefficient between the two assets is reported as -0.5. Given this information, what will be the effect of adding Asset Y to a portfolio already containing Asset X?