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Explain the assertion that the relationship between the standard deviation on a portfolio and standard deviations...

Explain the assertion that the relationship between the standard deviation on a portfolio and standard deviations of the assets in the portfolio is not a simple one.

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Portfolio Standard Deviation refers to the volatility of the portfolio which is calculated based on three important factors that include the standard deviation of each of the assets present in the total Portfolio, the respective weight of that individual asset in total portfolio and correlation between each pair of assets of the portfolio.

Portfolio Standard Deviation is calculated based on the standard deviation of returns of each asset in the Portfolio, the proportion of each asset in the overall portfolio i.e. their respective weights in the total portfolio and also the correlation between each pair of assets in the portfolio.

  • A high portfolio standard deviation highlights that the portfolio risk is high and return is more volatile in nature and as such unstable as well.
  • A Portfolio with low Standard Deviation implies less volatility and more stability in the returns of a portfolio and is a very useful financial metric when comparing different portfolios.

jeff jeffy answered 1 year ago
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