Unlocking Financial Data by Justin Pauley

Author:Justin Pauley
Language: eng
Format: epub
Publisher: O'Reilly Media
Published: 2017-10-24T04:00:00+00:00

Path 1: Excel

This section covers the Excel implementation, If you’re following Path 2, all the techniques should be implemented in Excel, as shown in this section, and will be accessible in Access through the linked tables.

Variance, Volatility, and Standard Deviation

Before diving into the complicated calculations, it is important to understand a few terms. In the financial world, both variance and standard deviation are measurements of volatility and risk. Standard deviation and variance are related terms; in fact, standard deviation is simply the square root of variance. A portfolio’s variance is a function of the individual position’s size relative to the portfolio size (or “weight”), the standard deviation (volatility) of the position’s historical returns, and the correlation (or covariance) between each position in the portfolio. Incorporating the correlation among positions is important because it measures the benefits of diversification. Without getting into too much math, we are going to measure the risk of our portfolio by calculating the standard deviation.

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