Apr 23, 2013

Average standard deviation

If I have monthly returns for 10 different mutual funds, how do I calculate the average standard deviation for all the 10 funds together? Can I use the average return of each month for all the 10 funds or should I calculate the standard deviation of each fund first?

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Dubya

11y

Calculate the standard deviation of each fund first and then take the average of that. If you average the returns, you will dramatically lower the standard deviation calculated (it's wrong in other words).

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dannee_

11y

ah thats what i thought, thanks man. Is it the same for the returns? Because I averaged the monthly returns so that I could plot them in a diagram.

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Dubya

11y

dannee_:
ah thats what i thought, thanks man. Is it the same for the returns? Because I averaged the monthly returns so that I could plot them in a diagram.

Is what the same for the returns?

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''You can fool some of the people all of the time, and those are the ones you need to concentrate on.'' — President George W. Bush 0.5 bb

FinanceWhiz1989

11y

Best Response

dannee_:
If I have monthly returns for 10 different mutual funds, how do I calculate the average standard deviation for all the 10 funds together? Can I use the average return of each month for all the 10 funds or should I calculate the standard deviation of each fund first?

It depends on the extent to which the 10 different funds are correlated with one another. You can do this on excel or with stat software. However, you will likely see some gains from diversification (that is, real correlations usually aren't exactly 1, so the SD of the portfolio will be less than the weighted average SD of the funds).

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Dubya

11y

FinanceWhiz1989:
dannee_:
If I have monthly returns for 10 different mutual funds, how do I calculate the average standard deviation for all the 10 funds together? Can I use the average return of each month for all the 10 funds or should I calculate the standard deviation of each fund first?

It depends on the extent to which the 10 different funds are correlated with one another. You can do this on excel or with stat software. However, you will likely see some gains from diversification (that is, real correlations usually aren't exactly 1, so the SD of the portfolio will be less than the weighted average SD of the funds).

WTF are you talking about? No, it does not 'depend' for what he's trying to do. The correlations are less than one, because he is looking at different funds. You're trying to complicate this and it's unnecessary and wrong. What you say about the "SD of the portfolio will be less than the weighted average SD of the funds" is true, but completely irrelevant.

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''You can fool some of the people all of the time, and those are the ones you need to concentrate on.'' — President George W. Bush 0.5 bb

FinanceWhiz1989

11y

Dubya:
FinanceWhiz1989:
dannee_:
If I have monthly returns for 10 different mutual funds, how do I calculate the average standard deviation for all the 10 funds together? Can I use the average return of each month for all the 10 funds or should I calculate the standard deviation of each fund first?

It depends on the extent to which the 10 different funds are correlated with one another. You can do this on excel or with stat software. However, you will likely see some gains from diversification (that is, real correlations usually aren't exactly 1, so the SD of the portfolio will be less than the weighted average SD of the funds).
WTF are you talking about? No, it does not 'depend' for what he's trying to do. The correlations are less than one, because he is looking at different funds. You're trying to complicate this and it's unnecessary and wrong. What you say about the "SD of the portfolio will be less than the weighted average SD of the funds" is true, but completely irrelevant.

I concentrated in statistics at Wharton UG, where I helped teach four different courses in statistics. I'm not sure why you're so angry, but thanks for the comment regardless.

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SirTradesaLot

11y

OP -- this is a poorly worded question. Are you trying to determine the avg vol of each of the funds or are you trying to determine the vol of the combo of the ten funds?

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dannee_

11y

SirTradesaLot:
OP -- this is a poorly worded question. Are you trying to determine the avg vol of each of the funds or are you trying to determine the vol of the combo of the ten funds?

im trying to determine the avg vol of each of the funds, so I can compare it with another group of funds. So im not interested in knowing the vol of the combo.

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SirTradesaLot

11y

dannee_:
SirTradesaLot:
OP -- this is a poorly worded question. Are you trying to determine the vol of each of the funds or are you trying to determine the vol of the combo of the ten funds?

im trying to determine the vol of each of the funds, so I can compare it with another group of funds. So im not interested in knowing the vol of the combo.

Ok, so I would do it the way the guy at the top (Dubya) said to do it. Calculate the vol of each fund and then average those vols. If you're not making a portfolio out of these ten funds, you don't need to worry about their correlations. It should be as simple as it gets.

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dannee_

11y

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