Background: The transition toward renewable energy has positioned green finance at the forefront of global capital markets. Despite growing interest in environmentally sustainable investments, fossil fuel (brown) assets remain dominant. Sweden, a leader in renewable energy and sustainable finance, offers a unique context to examine how green and brown energy assets interact, particularly in a policy-driven market that emphasizes decarbonization and energy independence.                     

Purpose: This study explores the return dynamics and volatility behavior between Swedish green energy stocks and fossil fuel-based energy assets. It investigates whether brown energy returns significantly influence green equity returns and evaluates the optimal portfolio composition between these asset types. The goal is to contribute empirical insights into asset allocation strategies within green finance, specifically under the framework of risk minimization and modern portfolio theory.       

Method: A quantitative, deductive research approach is used, applying GARCH (1,1) models to daily return data from Swedish green energy firms and fossil fuel commodities. The study evaluates return interactions and volatility patterns while constructing a minimum variance portfolio. Data from 2020–2024 were analyzed, with model diagnostics ensuring validity. The methodological framework combines financial econometrics with portfolio theory to assess risk dynamics and diversification potential.                    

Conclusion: The results reveal significant volatility clustering among Swedish green energy stocks and partial influence from brown energy returns, supporting the hypothesis of interconnected markets. Green stocks tend to receive higher weights in minimum variance portfolios, underscoring their diversification benefits. However, the relationship is complex and sensitive to external shocks, suggesting that investors should consider both market conditions and policy contexts when integrating green assets.