Finance
Calculate the risk of a two-stock portfolio
=SQRT(B1^2*B3^2+B2^2*B4^2+2*B1*B2*B3*B4*B5)How it works in Excel
- B1 and B2 are the weights.
- B3 and B4 are the standard deviations.
- B5 is the correlation between them.
- Lower correlation means lower risk, which is why diversifying works.
- Without the SQRT, the result is the variance.
The idea in general
Two stocks that do not move together can smooth out each other's ups and downs.
What I assumed
- The weights are in B1 and B2, the risks are in B3 and B4, and the correlation is in B5.
Check the result on your own data before relying on it.