A portfolio has two stocks A (60% weights) & B (40% weights) with a return of 8% and 10% respectively and SD of 15% and 20% respectively. I understand that it is easier to calculate portfolio return as 8% * 0.6 + 10% * 0.4 = 8.8% but how to calculate standard deviation of the portfolio? I remember that is not as straight forward to calculate as portfolio return. Thanks for any help!
You have to use that variance formula : (w1^2)(sd1^2)+(w2^2)(sd2^2)+2w1w2cov1,2 Then take the square root of that.
Weight squared times variance of A plus weight squared times variance of B plus 2 times the weight of A times the weight of B times the covariance (or is it correlation) of the two assets with each other.
Good point, I calculated the variance of the portfolio - after you’re done with what I did, the square root needs to be taken. Nice catch.
formula for portfolio variance is: W^2a x Var a + W^2b x Var b + 2 x W a x Wb x Cov ab and then take the sq. root of the Variance to get the standard deviation. Also, note the Cov ab = Corr. ab x std. dev. a x std. dev. b. This