![weighted standard deviation of a portfolio weighted standard deviation of a portfolio](https://www.wallstreetmojo.com/wp-content/uploads/2019/03/Portfolio-Variance-Formula-1.jpg)
Raman plans to invest a certain amount of money every month in one of the two Funds which he has shortlisted for investment purpose. Source: Portfolio Standard Deviation () Example
#WEIGHTED STANDARD DEVIATION OF A PORTFOLIO HOW TO#
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Portfolio Standard Deviation is calculated based on the standard deviation of returns of each asset in the portfolio, the proportion of each asset in the overall portfolio i.e., their respective weights in the total portfolio, and also the correlation between each pair of assets in the portfolio.This helps in determining the risk of an investment vis a vis the expected return. Interpretation of Standard Deviation of Portfolio The less than perfect correlation has reduced the standard deviation from 15% to 13.6% which indicates a reduction in risk: the benefit of diversification.Portfolio Standard Deviation refers to the volatility of the portfolio which is calculated based on three important factors that include the standard deviation of each of the assets present in the total Portfolio, the respective weight of that individual asset in total portfolio and correlation between each pair of assets of the portfolio. The portfolio standard deviation is 13.6%. The portfolio standard deviation after consideration of correlation: S BB = standard deviation of Bits & Bytes S BG = standard deviation of Black Gold and We can illustrate the fact that diversification indeed reduces the risk level by finding the weighted average standard deviation of the investments and then finding the portfolio standard deviation after taking into account the correlation between the two investments. Okoso requested you to calculate for him the extent to which the risk was reduced by the strategy. He started a portfolio with $2,000, invested 50% in Black Gold Inc., an energy company, and 50% in Bits and Bytes, an information technology firm.įollowing statistics relate to these two investments:Ĭorrelation coefficient between returns of BG & B&B is 0.6. In a finance article published in a magazine in those days, he read that the not-all-eggs-in-one-basket approach to investing is useful because it helps reduce risk. A year back he started following the stocks. Multi-Asset Portfolio SD Calculator: Asset Ρ CA = correlation coefficient between returns on asset C and asset A. Ρ BC = correlation coefficient between returns on asset B and asset C.
![weighted standard deviation of a portfolio weighted standard deviation of a portfolio](https://s3.studylib.net/store/data/006919535_1-d93a324a2a81978c770b7b1e485aab98-768x994.png)
Ρ AB = correlation coefficient between returns on asset A and asset B. Ω B = weight of asset B in the portfolio Σ P = is the portfolio standard deviation Σ P = (w A 2σ A 2 + w B 2 σ B 2 + w C 2σ C 2 + 2w Aw Bσ Aσ Bρ AB + 2w Bw Cσ Bσ Cρ BC + 2w Aw Cσ Aσ Cρ AC) 1/2 Portfolio standard deviation for a two-asset portfolio is given by the following formula:
![weighted standard deviation of a portfolio weighted standard deviation of a portfolio](https://financetrain.sgp1.cdn.digitaloceanspaces.com/pr2.gif)
Owing to the diversification benefits, standard deviation of a portfolio of investments (stocks, projects, etc.) should be lower than the weighted average of the standard deviations of the individual investments. One of the most basic principles of finance is that diversification leads to a reduction in risk unless there is a perfect correlation between the returns on the portfolio investments. It is a measure of total risk of the portfolio and an important input in calculation of Sharpe ratio. Portfolio standard deviation is the standard deviation of a portfolio of investments.