Standard Deviation of a Portfolio

Standard Deviation of a Portfolio - 7-1Standard Deviation...

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Unformatted text preview: 7-1Standard Deviation of a Portfolio •The Formulajiσσσσσσijijij2iiportrCovwherej,andiassetsfor return ofratesebetween thcovariancetheCoviasset for return ofratesofvariancetheportfolioin thevalueofproportionby thedeterminedareweightswhereportfolio,in theassetsindividualtheofweightstheWportfoliotheofdeviation standardthe:wheren1in1iijCovjwn1iiw2i2iwport=====∑=∑=∑=+=7-2Standard Deviation of a Portfolio •Computations with A Two-Stock Portfolio –Any asset of a portfolio may be described by two characteristics:•The expected rate of return•The expected standard deviations of returns–The correlation, measured by covariance, affects the portfolio standard deviation–Low correlation reduces portfolio risk while not affecting the expected return7-3Standard Deviation of a Portfolio •Two Stocks with Different Returns and Risk1 .10 .50 .0049 .07 2 .20 .50 .0100 .10W)E(RAsset ii2iissCase Correlation Coefficient Covariancea +1.00 .0070b +0.50 .0035c 0.00 .0000d -0.50 -.0035e -1.00 -.00707-4...
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This note was uploaded on 01/24/2012 for the course FIN 4360 taught by Professor Davidbray during the Spring '12 term at Kennesaw.

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Standard Deviation of a Portfolio - 7-1Standard Deviation...

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