Weights of the assets in the portfolio, in row format = WĢ. The standard deviation of asset B = 0.3713Īnd if we invest equally in both assets, thenĪnd weight of B = 0.5 Portfolio SD =( (0.5^2*0.3387^2)+(0.5^2*0.3713^2)+(2*0.5*0.5*-0.0683))^0.5Įxcel sheet showing the above example can be downloaded from here.įinding portfolio standard deviation under the Modern Portfolio theory using matrix algebra requires three matricesġ. Thus, standard deviation of asset A = 0.3387 In Excel, we can find the standard deviation by Thus, we need the standard deviation of the two assets, the proportion of investment in each asset (weights), and the covariance term between the two assets. A BĪs we know, the portfolio standard deviation under the modern portfolio theory is calculated as =
To build our concept of the portfolio risk, we shall calculate it first manually in EXCEL, then we shall replicate the results using matrix notations in Stata.Ĭonsider the following set of returns for two assets, i.e asset A and B. The implied cost of capital (ICC) | GLS model | Stata | Gebhardt et al.
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