![]() Where R(k i,k j) is the correlation coefficient of returns of ith asset and jth asset, σ(k i) is the standard deviation of return of ith asset, and σ(k j) is the standard deviation of return of jth asset. In terms of correlation coefficient, the formula above can be transformed as follows: Where N is a number of assets in a portfolio, w i is a proportion of ith asset in a portfolio, w j is a proportion of jth asset in a portfolio, σ 2 (k i) is variance of return of ith asset, and Cov(k i,k j) is covariance of returns of ith asset and jth asset. The standard deviation of portfolio consisting of N assets can be calculated as follows: ![]() Thus, the standard deviation of return of a well-diversified portfolio depends more on covariances than on the standard deviation of return of individual assets. The greater the number of assets (and the proportion of each asset is small), the importance of covariance is increasing. The number of assets in the portfolio is important in diversification. The covariance of returns between each pair of assets in the portfolio.Standard deviation of return of each asset in the portfolio.Proportion of each asset in the portfolio.Its value depends on three important determinants. Standard deviation of portfolio return measures the variability of the expected rate of return of a portfolio.
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