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When calculating the portfolio's historical volatility, do I need to factor the volatility of each asset individually and then do a covariance calculation or can I get away by measuring the volatility of the total portfolio return?

My gut feeling says no, but I cant work out why?

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  • $\begingroup$ Historical or implied portfolio volatility? $\endgroup$
    – Frido
    Apr 4 at 16:24
  • $\begingroup$ Historical, edited the question $\endgroup$
    – user1234
    Apr 4 at 16:37
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    $\begingroup$ In that case I would just calculate the potfolio vol as a whole. You'll just invite trouble if you calc the individual funds' or stocks' vol and then try to combine them using some covar matrix. But if you want to analyze the contribution of the component VaRs to the portfolio VaR then you of course need to calc the separate vols. $\endgroup$
    – Frido
    Apr 4 at 17:02
  • $\begingroup$ The portfolio is itself an asset and has historical returns associated with it, and from these returns you can compute a hitorical volatility. In my experience this is the easiest way to proceed in most cases. $\endgroup$
    – nbbo2
    Apr 8 at 13:58
  • $\begingroup$ Something to consider: Portfolios often have rules-based allocations (e.g., large-cap only). If a stock increases in size from mid-cap to large-cap, it may enter the portfolio when it wouldn't be eligible before. In this case, including historical vols of that asset in your portfolio's vol may not be a good idea, as you're including vols from when the stock was a mid-cap and therefore inelegible to be in the portfolio. $\endgroup$
    – Rylan
    Sep 5 at 10:41

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Two portfolios can consist of different assets, but can have the same volatility over the same period of time, so individual analysis of the assets seems futile in this sense.

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