The formula says that the risk of a portfolio is made up of the weighted risks of the assets in the portfolio (the first 2 terms) plus an adjustment for how those assets move together (the last term). The first two terms are necessary because the portfolio risk must be affected by the risks of the individual assets. The last term is necessary because we are looking at the aggregate movements of the portfolio, which are going to be strongly affected by how the assets interact. Thus, if the assets tend to move in opposite directions then the last term will adjust the overall portfolio risk downward.