V is the covariance matrix, and W T is the transpose of the matrix W. The variance of a portfolio of correlated assets can be written as W TvW, where W is a column vector (ie a matrix with a single column) containing the weights of different assets in the portfolio. Yet this is useful should you wish to see how this really would work in practice, or wish to test some additional ideas, for example, the impact of changing correlations on portfolio volatility. You are unlikely to be asked to do this in the exam, in fact the multiple choice format is very poorly suited to testing such knowledge. This tutorial looks at how portfolio risk calculations can be modeled within Excel. What we really need for that is matrices, and Excel. This formula is not really scalable to real life situations where a portfolio may consist of tens or hundreds of securities. This formula is very useful in forming an intuitive understanding of how correlation affects risk, and examining various concepts relating to portfolio construction. This brief article is a practical demonstration of how portfolio variance can be modeled in Excel – the underlying math, and an actual spreadsheet for your playing pleasure! Enjoy!Ĭalculating portfolio variance for a portfolio of two assets with a given correlation is a fairly trivial task – you use the formula to get the portfolio variance, and take the square root to get the standard deviation or volatility. But consider a situation when there are 10, 15, maybe hundreds of assets. When it comes to calculating portfolio variance with just two assets, life is simple. This article is about an Excel model for calculating portfolio variance.
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