# two-asset portfolio variance

• Jul 30th 2013, 04:37 PM
parex
two-asset portfolio variance
Hi,

I'm having problems sorting out whether a segment of a youtube video on portfolio theory is correct. The issue relates to calculating the variance of a two-asset portfolio. Since there is no linearity the addition of a second asset cannot be assumed to simply add its variance to the variance of the first asset, due to the fact that the two assets, treated as random variables, are not necessarily uncorrelated. Therefore, the formula would be something like:

Var (p) = [Weighting (Asset 1)2 * Var (Asset 1)] + [W(Asset 2)2 * Var (Asst 2)] + [ 2 * W1* W2* cov (Ass1, Ass2) ]

However, the equation in the youtube video is:

Var (p) = [Weighting (Asset 1)2 * Var (Asset 1)] + [W(Asset 2)2 * Var (Asst 2)] + [ 2 * W1* W2* SD (Ass1) * SD (Ass2) ]

Further, the author of the video claims that [ 2 * W1* W2* SD (Ass1) * SD (Ass2) ] is the covariance.

What am I missing?
• Jul 31st 2013, 05:36 AM
parex
Re: two-asset portfolio variance