How to Calculate Portfolio Standard Deviation in Excel

The standard deviation of a portfolio is a measure of the volatility or risk of the portfolio. It helps investors understand the potential range of returns of their investment portfolio. By calculating the standard deviation, investors can assess the level of risk they are comfortable with and make informed decisions about their investments. In this article, we will guide you through the process of calculating portfolio standard deviation in Excel.

Step 1: Gather Data

Before calculating portfolio standard deviation, you need to collect the necessary data. Make a list of all the assets in your portfolio and their corresponding weights or proportions. Additionally, you will need historical return data for each asset over a specific time period.

Step 2: Set Up Excel Spreadsheet

Open Microsoft Excel and create a new spreadsheet. Label the columns as “Asset” and “Weight” for your portfolio assets. In the adjacent columns, label the time periods for which you have historical return data.

Step 3: Enter Data

Enter the name of each asset in the “Asset” column and its corresponding weight in the “Weight” column. Input the historical return data for each asset in the respective columns for the time periods.

Step 4: Calculate Individual Asset Returns

In a new column, calculate the individual returns for each asset using the formula: (Ending Value – Beginning Value) / Beginning Value. This will give you the percentage return for each asset over the selected time period.

Step 5: Calculate Portfolio Return

To calculate the portfolio return, multiply the individual asset return by its corresponding weight and sum them up. Use the formula: SUMPRODUCT(Asset Returns, Weights).

Step 6: Calculate Portfolio Variance

Next, calculate the portfolio variance using the COVARIANCE.S function in Excel. The formula is: COVARIANCE.S(Asset Returns, Weights).

Step 7: Calculate Portfolio Standard Deviation

Finally, calculate the portfolio standard deviation by taking the square root of the portfolio variance. Use the formula: SQRT(Portfolio Variance).

FAQs about Calculating Portfolio Standard Deviation in Excel

1. What is standard deviation?

Standard deviation is a measure of the dispersion of a set of data points from its mean. It provides insight into the volatility or risk associated with the data.

2. Why is portfolio standard deviation important?

Portfolio standard deviation helps investors assess the risk of their investment portfolio. It allows them to understand the potential range of returns and make informed decisions.

3. Can I calculate portfolio standard deviation without using Excel?

Yes, you can calculate portfolio standard deviation manually using mathematical formulas. However, Excel simplifies the process and saves time, especially for portfolios with multiple assets.

4. What is the significance of weights in portfolio standard deviation calculation?

Weights represent the proportion of each asset in the portfolio. They play a crucial role in determining the impact of each asset on the overall portfolio’s risk.

5. Can I calculate portfolio standard deviation for any time period?

Yes, you can calculate portfolio standard deviation for any desired time period, depending on the availability of historical return data.

6. How frequently should I update the data for calculating portfolio standard deviation?

It is recommended to update the data regularly, preferably monthly or quarterly, to reflect the most recent returns and weights of the assets.

7. Can I calculate portfolio standard deviation for a hypothetical portfolio?

Yes, you can calculate portfolio standard deviation for a hypothetical portfolio by assigning appropriate weights and using historical return data for similar assets.

8. How does portfolio standard deviation help in diversification?

Portfolio standard deviation considers the correlation between assets. By including assets with low or negative correlation, it helps in reducing the overall portfolio risk through diversification.

9. Can I use Excel functions for non-normal distributions?

Yes, Excel functions for calculating portfolio standard deviation, such as COVARIANCE.S and SQRT, can be used for non-normal distributions.

10. How can I interpret a high portfolio standard deviation?

A high portfolio standard deviation indicates a higher level of risk and volatility. Investors with a low risk tolerance may prefer a lower standard deviation.

11. Can I compare the standard deviation of two different portfolios?

Yes, you can compare the standard deviation of two different portfolios to assess which one has higher or lower risk.

12. Are there any limitations to using portfolio standard deviation?

Portfolio standard deviation assumes that past returns are an accurate representation of future returns. However, it is important to note that future returns can deviate significantly from historical data due to various factors.