How do you find the lowest variance?

How do you find the lowest variance?

Less Common Measures of Variance

1. Find the mean of the data.
2. Subtract the mean from each data value to get the deviation from the mean.
3. Take the absolute value of each deviation from the mean.
4. Total the absolute values of the deviations from the mean.
5. Divide the total by the sample size.

How do you find the variance of two assets?

To calculate the variance of a portfolio with two assets, multiply the square of the weighting of the first asset by the variance of the asset and add it to the square of the weight of the second asset multiplied by the variance of the second asset.

What is a minimum variance portfolio?

Minimum Variance Portfolio is the technical way of representing a low-risk portfolio. It carries low volatility as it correlates to your expected return (you’re not assuming greater risk than is necessary).

What do you mean by minimum variance portfolio?

Definition: A minimum variance portfolio indicates a well-diversified portfolio that consists of individually risky assets, which are hedged when traded together, resulting in the lowest possible risk for the rate of expected return.

How to calculate the minimum variance of a portfolio?

For these two assets, investing 25% in Stock A and 75% in Stock B would allow you to achieve a minimum variance portfolio for these two assets. If we want to find the exact minimum variance portfolio allocation for these two assets, we can use the following equation: x = (σ b²-ρ abσ aσ b) / (σ a² + σ b² – 2ρ abσ aσ b)

How is the standard deviation of the portfolio calculated?

Knowing the relationship between covariance and correlation, we can rewrite the formula for the portfolio variance in the following way: The standard deviation of the portfolio variance can be calculated as the square root of the portfolio variance:

When does a portfolio include two risky assets?

When a portfolio includes two risky assets, the Analyst needs to take into account expected returns, variances and the covariance (or correlation) between the assets’ returns. The differences from the earlier case in which one asset is riskless occur in the formula for portfolio variance.

Can a risk-free asset have zero variance?

Since the risk-free asset is “risk-free”, it has zero variance. When adding the risk-free asset to the graph (assuming a risk-free rate of 3%), additional investment options become available that are more appealing than simply investing in Stocks A and B alone.