1. What is Portfolio Variance?

Portfolio variance measures the dispersion of returns of a portfolio. It's an important concept in modern portfolio theory that helps investors understand the risk associated with their investment portfolio.

2. How Does the Calculator Work?

The calculator uses the portfolio variance formula:

Where:

• \( w1 \) — Weight of asset 1 in the portfolio (decimal)
• \( var1 \) — Variance of asset 1's returns
• \( w2 \) — Weight of asset 2 in the portfolio (decimal)
• \( var2 \) — Variance of asset 2's returns
• \( cov12 \) — Covariance between the returns of asset 1 and asset 2

Explanation: The formula accounts for both individual asset risks (variances) and how the assets move together (covariance).

3. Importance of Portfolio Variance

Details: Portfolio variance helps investors understand the overall risk of their portfolio, considering both individual asset risks and diversification benefits.

4. Using the Calculator

Tips: Enter weights as decimals (must sum to 1), variances and covariance in consistent units. Weights must be between 0 and 1.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between variance and covariance?
A: Variance measures an asset's own volatility, while covariance measures how two assets move together.

Q2: How do I interpret portfolio variance?
A: Higher variance means higher risk. Compare to individual asset variances to see diversification benefits.

Q3: What if I have more than two assets?
A: The formula extends naturally with more terms for additional assets and their covariances.

Q4: Can variance be negative?
A: No, variance is always non-negative as it's a squared measure of dispersion.

Q5: How does correlation affect portfolio variance?
A: Lower correlation between assets reduces portfolio variance through diversification benefits.