Step #1: Find the Mean Return of Stocks

Step #2: Calculate the Variance of Each Stock

Step #3: Find the Standard Deviation of Each Stock

Step #4: List the Standard Deviation of Each Fund in Your Portfolio

Step #5: Weight Each Investment Held

Step #6: Find the Correlation Between Both Funds

Step #7: Calculate the Portfolio Variance

Step #8: Find Portfolio Standard Deviation

Step #1:
Find the Mean Returbn of each Stocks

For this exercise, we are going to find the standard deviation of two different
investments. First, we will calculate their average return for the last 5 years.

Investment A: (11.53% + 0.75% + 12.75% + 32.67% + 15.77%)/5 = 14.69%

Investment B: (4.13% + 3.86% + {-0.32%} + 11.27% + 21.63%)/5= 8.11%

 Step #2:
Calculate the Variance of Each Stock

Since standard deviation is the square root of variance, we must first find the
variance of each investment.

This is a two-part process with for each investment. You first find the individual
variance for each year & square the sums.

Then, you divide the sum of the squares from the first step by the 1 less the number
of years (∑/n-1). For this example, we will divide the sum of the squares by 4 since
we found the average return for 5 years in Step #1.

Investment A: (11.53%-14.69%)² + (0.75%-14.69%)² + (12.75%-14.69%)² + (32.67%-

14.69%)² + (15.77%-14.69%)²= 532.5196/4= 133.1299

Investment B: (4.13%-8.11%)² + (3.85%-8.11%)² + (-0.32%-8.11%)² + (11.27%-8.11%)²

+ (21.63%-8.11%)²= 297.8289/4= 74.457225

Step #3:
Find the Standard Deviation of Each Stock

The standard deviation of each stock or portfolio is the square root of the variance
we calculated in the previous step.

Investment A: √133.1299= 11.54%

Investment B: √74.457225= 8.63%

 Step #4:
List the Standard Deviation of Each Fund in Your Portfolio

From the previous step, we found out that the standard deviation was 11.54%
for Investment A and 8.63% for Investment B.

Step #5:
Weight Each Investment Held

Next, you need to determine the weighted of both funds in the portfolio by
comparing the size of the investment to the total size of the portfolio.

Here’s what we know:

Total Portfolio Value: $7,500

Value of Investment A: $6,000 ($6000/$7500=80% of total portfolio value)

Value of Investment B: $1,500 ($1500/$7500=20% of total portfolio value)

 Step #6:
Find the Correlation Between Both Funds

The next step is finding the correlation between the two funds. It will range between
-1 & 1.

where

RAi =Return of stock A in the ith interval

RBi =Return of stock B in the ith interval

RA=Mean of the return of stock A

RB=Mean of the return of stock B

n = Sample size or the number of intervals

Compute each interval first and add then divide to 4.

Express in decimal

= (0.1153-0.1469) (0.0413-0.0811) + (0.0075-0.1469) (0.0386-0.0811) + (0.1275-

0.1469) (-0.0032-0.0811) + (0.3267 - 0.1469) (0.1127-0.0811) + (0.1577-0.1469)
(0.2163-0.0811)/5-1

= Ans x 100
For this example, the correlation is 0.3990, which means both stocks act very similar.

Step #7:
Calculate the Variance

Now we are going to find the portfolio variance with the formula below.

(0.80²)(0.1154²)+(0.20²)(0.0863²)+(2)(0.80)(0.20)(0.1154)(0.0863)(0.3990)

Portfolio Variance= 0.010092457

Step #8: 
Find Portfolio Standard Deviation

This is the last step to finding your portfolio standard deviation.

All we have to do is calculate the square root of the portfolio variance!

√ 0.010092457 = 0.100461224
= Ans x 100

Portfolio Standard Deviation=10.05%