Question

Q7: Show the Portfolio Standard Deviation (equation). Say for total returns on assets in a stock portfolio. Show equations!

--What would LOW covariance between stocks in the portfolio have on the portfolio standard deviation? Q8: What is the value of using regression techniques? Show Time-Series Forecast Regression Equation/Definition: 5 Variable Model!

--What is and how would you use, in analyzing stocks or companies: Show Equations:

--Cross-Sectional Regression:

--Time-Series Regression (Forecasting)

Answer 1

Q7.

Portfolio Standard Deviation

Standard deviation of portfolio return measures the variability of the expected rate of return of a portfolio. Its value depends on three important determinants.

• Proportion of each asset in the portfolio.

• Standard deviation of return of each asset in the portfolio.

• The covariance of returns between each pair of assets in the portfolio.

Equation for Portfolio Standard deviation

The most important quality of portfolio standard deviation is that its value is a weighted combination of the individual variances of each of the assets adjusted by their covariances.

In case the portfolio consists of only two assets the equation will be-

Similarly there can be more than two assets involved in forming a portfolio for that the equation will be -

Here, N is the number of assets involved.

Effect of low covariance on portfolio standard deviation

Covariance is a statistical measure of how two assets move in relation to each other.

If the covariance between assets in a portfolio is low the overall standard deviation of portfolio also falls because if the price of one asset falls, the price of other one will rise creating a balance in overall performance of the portfolio.