Variance and Standard Deviation of a Portfolio
We learned about how to calculate the standard deviation of a single asset. Let’s now look at how to calculate the standard deviation of a portfolio with two or more assets.
The returns of the portfolio were simply the weighted average of returns of all assets in the portfolio. However, the calculation of the risk/standard deviation is not the same. While calculating the variance, we also need to consider the covariance between the assets in the portfolio. If the assets are perfectly correlated, then the simple weighted average of variances will work. However, when we have to account for the covariance, the equation will change.
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