Question

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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Answer #1

Relationship between the standard deviation on a portfolio and standard deviation of the Asset in the portfolio is a complex one, as standard deviation of assets in a portfolio is only calculated after taking three major factors which would be

A. Weighting of a particular asset in the overall portfolio

B. Assignment of risk to that asset in the overall portfolio

C. Correlation between different assets in the same portfolio.

These are highly complex calculations which are used to find the standard deviation of an asset in the entire portfolio, and standard deviation of portfolio is entirely different as it is used to calculate the deviation of the returns of overall portfolio with itself so it is a highly complex method and it is not simple to find the relationship between the standard deviation on a portfolio and standard deviation of the assets in a portfolio

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