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I Volatility of investment (/w currency hedging)

  1. Apr 30, 2016 #1
    I´ve been trying to compute a volatility of invesment with currency hedging and I have a question. Let's take this example. We have our money in a fond copying the S&P500 index, which has 16% volatility, we also know that the current volatility of a dollar toward our currency is 5%. We want to know the volatility of the whole invesment.

    Can I compute as following? If so, what is the reason for adding the two deviations instead of mulitplying them considering the volalitity of an index and a currency are mutualy independent.

    $$\sigma=\sqrt{(16^2)+(5^2)}$$

    Thank you.
     
  2. jcsd
  3. Apr 30, 2016 #2

    mfb

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    Staff: Mentor

    How would multiplying them make sense? If one gets fixed, do you lose all volatility?

    What you can multiply are the actual courses, e.g. for deviations like (1+0.16)*(1+0.05) = 1+0.16+0.05+0.16*0.05. Neglect the last term, and you see that the deviations add.
    If the deviations become large, neglecting the last term does not work any more.
     
  4. Apr 30, 2016 #3
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