Hi there, this information is relevant to those who are already members of the Premium Forum and to those who would like to become members. To become or renew your membership in the Premium Forum, you need to subscribe monthly on this website. Also anyone who wishes to support my work can do so here or let me know their preferred payment method. Thank you.

Portfolio Volatility – Market Risk Metrics

All related to Portfolio Trading and Investments.
Post Reply
User avatar
portfoliomaster
Posts: 3
Joined: Sun Oct 16, 2022 9:36 am

Portfolio Volatility – Market Risk Metrics

Volatility for a portfolio may be calculated using the statistical formula for the variance of the sum of two or more random variables which is then square rooted. Alternatively, the volatility for a portfolio may be calculated based on the weighted average return series calculated for the portfolio. Both of these methodologies are discussed below.

1. The portfolio volatility formula
Consider a portfolio of three assets X, Y and Z with portfolio weights of a, b and c respectively. The portfolio volatility is:
rm29.gif
Variance (X) = Variance in asset X’s returns, i.e. X’s returns volatility squared (σx2)

Variance (Y) = Variance in asset Y’s returns, i.e. Y’s returns volatility squared (σy2)

Variance (Z) = Variance in asset Z’s returns, i.e. Z’s returns volatility squared (σZ2)

ρxy = correlation coefficient of X and Y returns

ρxz = correlation coefficient of X and Z returns

ρyz = correlation coefficient of Y and Z returns

If the assets in the portfolio are independent of each other the correlation coefficient terms in the equation above would be zero. If the assets in the portfolio are perfectly correlated with each other then the volatility of the portfolio would simply be the weighted average sum of the asset return volatility.

(full story)
You do not have the required permissions to view the files attached to this post.
Post Reply