Portfolio Volatility
In short
Annualised standard deviation of portfolio returns — lower means smoother ride
Portfolio volatility measures how much your combined investments bounce around. Unlike individual stock volatility, it accounts for diversification — when some holdings go up while others go down, they partially cancel out, reducing overall portfolio risk.
Portfolio volatility is the annualised standard deviation of the weighted portfolio returns. It is always less than or equal to the weighted average of individual asset volatilities (unless all assets are perfectly correlated), because diversification reduces overall risk. It is a core input to modern portfolio theory, Sharpe ratio calculations, and Value at Risk estimates.
Formula
σ_p = √(w'Σw) where w = weight vector, Σ = covariance matrixThresholds
- <8%
- Conservative
- 8-15%
- Moderate
- 15-25%
- Aggressive
- >25%
- Very aggressive
Related concepts
- Annualised Volatility — Volatility tells you how bumpy the ride is. If two investments both returned 10% in a year, but one went up and down wildly while the other climbed steadily, the wild one has higher volatility. It's like comparing a roller coaster to a gentle hill — both get you to the same height, but the experience is very different.
- Sharpe Ratio — Sharpe ratio measures how much return you get for every unit of risk you take. A Sharpe of 1.0 means for every 1% of risk, you earn 1% return above the risk-free rate. Higher is better.
- Diversification — If you put all your money in one stock and it crashes, you lose everything. Spread it across 20 different stocks, sectors, and even countries — when one falls, others may rise, protecting your overall wealth.
- Maximum Drawdown — If your portfolio hit $10,000 then fell to $6,000 before recovering, the max drawdown is 40%. It measures the worst experience a real investor would have endured.