Standard Deviation of a Portfolio Calculator
This calculator helps financial analysts and investors determine the standard deviation of a portfolio, providing insights into investment risk and volatility.
Calculator
Results
Data Source and Methodology
All calculations are strictly based on the formulas and data provided by authoritative financial sources.
The Formula Explained
Standard Deviation of a Portfolio: \(\sigma_p = \sqrt{\sum (w_i^2 \cdot \sigma_i^2) + \sum \sum (w_i \cdot w_j \cdot \sigma_i \cdot \sigma_j \cdot \rho_{ij})}\)
Glossary of Terms
- Asset Returns: The expected return of the assets in the portfolio.
- Asset Weights: The percentage composition of each asset in the portfolio.
- Correlation Matrix: A matrix showing the correlation coefficients between assets.
How It Works: A Step-by-Step Example
Suppose you have a portfolio of two stocks with returns of 5% and 7%, weights of 50% each, and a correlation of 0.8. Using the formula, you can compute the portfolio's standard deviation.
Frequently Asked Questions (FAQ)
What is standard deviation in a portfolio?
Standard deviation is a measure of the dispersion of returns for a given security or market index. It's used by investors to gauge the amount of expected volatility.
Why is standard deviation important?
It helps investors understand the risk involved in holding a particular portfolio.
How can I reduce portfolio standard deviation?
By diversifying the portfolio and selecting assets with low correlation to each other.
What is a good standard deviation for a portfolio?
This depends on the investor's risk tolerance and the market conditions.
How does correlation affect standard deviation?
Higher correlation between assets increases the portfolio's standard deviation.