Portfolio Risk Calculation: Illustration of Portfolio Risk for Two Securities, Lecture notes of Finance

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Portfolio Risk Calculation: A simple

illustration

Finance II

th

November 2009

Portfolio Risk: Basic Data and

Calculations

A

B

ortfolio Weights

Period

Return on

A

Return on

B

Deviations

A

Deviations

B

Squared

Deviations

A

Squared

Deviations

B

Product of

Deviations

SUM

AVERAGE

Variance

Standard Deviation

Covariance

There are two securities under consideration for inclusion in a portfolio, A and B

Indirect Calculation of Portfolio Risk:

Using the Portfolio Risk Equation

VAR(P)=W

A

x VAR(A)+W

B

x VAR(A) + 2 W

A

W

B

COV(A,B)

W

A

x VAR(A)

3.

W

B

x VAR(B)

5.

2*W

A

*W

B

• COV(A,B)

5.

SUM = VAR(P) =

13.

SD(P)

=

3.

Calculating Portfolio Risk Using

Market Data

Portfolio Risk Calculation Continued

AVERAGE RETURN

VARIANCE

STANDARD DEVIATION

COVARIANCES

SECURITIES

VARIANCES

PORT. VAR

1 and 2

1and 3

1/N*AV.VAR

1and 4

1and 5

(1 - 1/N)* AV.COV

2 and 3

2 and 4

SUM

SUM =

2 and 5

c

ulating portfolio

AVERAGE

VAR (R)

3 and 4

SD[R]

3 and 5

4 and 5

SUM

AVERAGE CO-VAR

Use Excel Function

COMPANY NAME

BABCOCK

INTL.

FORTHPORTS

LAING

(JOHN)

SCOTTISH RADIO

HOLDINGS

STAGECOAC

H GROUP

EQUALLYWEIGHTEDSUM (Portfolio Return)