I'm considering a portfolio of multiple stocks (>2), and calculating their Standard Deviation/Variance and VaR for the portfolio. My question is about the below two ways to calculating them

  1. Consider the stocks indivisually, calculate their variance and Var, and then calculate the combined portfolio variance using the correlation matrix.
  2. Consider the returns of the combined portfolio, and then calculate the variance and Var.

While #2 seems a simpler approach, I've not really seen that approach followed anywhere. I'm curious to think what the difference would look like between the two approaches (if any). From my understanding #1 is usual approach that is followed.

  • 1
    $\begingroup$ #2 is based on our historical portfolio returns and is OK if the portfolio is static, but many portfolios are dynamic (sold one stock yesterday, bought 2 new stocks today, etc.). Then if we want the forward looking var for today's portfolio we have to use #1 with today's portfolio composition. And recompute it each new day. This is what Risk Departments usually do. $\endgroup$ – noob2 Mar 13 '20 at 12:06
  • $\begingroup$ So if the position don't vary at all, which one is proffered? $\endgroup$ – user23564 Mar 14 '20 at 17:40
  • $\begingroup$ In that case #2 is simpler. $\endgroup$ – noob2 Mar 15 '20 at 0:56

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