How to Calculate Covariance Between Stock and the Portfolio
The covariance between stock and its portfolio represents how much a stock varies in price in comparison to the variation of portfolio value. Calculating covariance by hand is a relatively lengthy process. However, if you are processing large amounts of data, which is often the case if you are dealing with stock prices, a spreadsheet program will make the process easier. Most spreadsheet programs have a function that calculates covariance automatically.
Other People Are Reading
Instructions
-
-
1
Obtain your data. You need two sets of data, specifically the performance of the stock and the performance of the portfolio. Preferably, data should start at a time when the stock was added to the portfolio until either the present or when the stock was removed from the portfolio. The data can be in daily, weekly or monthly form, and may be found from financial reporting publications and websites at no cost.
-
2
Organize your data into a spreadsheet. Pick two columns, and in the first column list the price of the stock, and in the second column list the performance of the portfolio in terms of value. Ensure that the number of rows for both columns is the same. So, if you have 100 observations for stock price and listed them in cells A1 to A100, portfolio value must be listed in B1 to B100, for example.
-
-
3
Calculate the covariance. Most spreadsheet programs have a function for this. Excel uses the covar function to calculate covariance. Pick an empty cell and type "=Covar(x,y)" into the formula bar, without the quote marks. The "x" in the formula represents the array for stock price and the "y" represents portfolio value. So, if cells A1 to A100 represent stock price, and cells B1 to B100 represent portfolio value, your formula should look like "=Covar(A1:A100,B1:B100)." Hit enter to calculate the covariance.
-
1
