Estimating Volatility for Equal-Weighted ESG Stock Portfolios

Summary

The document describes a question about measuring volatility for five equal-weighted portfolios drawn from S&P 500 constituents and grouped by ESG ratings. Constituents are updated monthly as index membership changes, while ESG group assignments are refreshed yearly. Because only stocks with ratings from the selected providers are included, the portfolios cover a subset of the index.

The author calculates the standard deviation of monthly portfolio returns across the sample and finds a value they believe is unexpectedly low. The document provides no answer, calculation details beyond that approach, or comparison benchmark, so it does not resolve whether the estimate is erroneous. It does, however, frame a useful measurement issue: volatility depends on how portfolio returns are constructed and on the return frequency and annualization convention. The reported figure is monthly, and the question leaves open whether it should be compared with monthly or annualized volatility, as well as how averaging constituent returns relates to portfolio-level returns.

Key ideas

• The portfolios group rated S&P 500 constituents by ESG level and weight included stocks equally.
• Index membership changes are reflected monthly, while ESG classifications are updated yearly.
• The author estimates volatility using the standard deviation of monthly portfolio returns.
• The document poses a concern about a low estimate but provides no resolution or benchmark.

Tags

# Volatility of S&P 500 based portfolios too low


# Volatility of S&P 500 based portfolios too low












I am trying to calculate the volatility of five portfolios consisting of S&P 500 stocks.

The portfolios consist roughly each of 20% of the S&P 500 members between 2015-2022, rebalanced monthly to account for stocks entering and leaving the index. The portfolios are built based on the members ESG ratings (portfolios: 'low', 'mid-low', 'mid', 'mid-high' and 'high'), meaning they are also rebalanced yearly to account for changing ESG ratings. At any point each stock is weighted equally within a given portfolio. Note that I only use stocks that are actually rated by the agencies in question (Refinitiv and Bloomberg), meaning that roughly 20% of the index falls away.

I have the returns of each portfolio on a monthly basis (using the average monthly return of each portfolio-member). When I now calculate the volatility of these monthly returns (via standard deviation) over the whole period 2015-2022 I get results of around 5.00% which to my knowledge is way too low.

Am I doing something wrong when calculating the volatility? Thanks to anyone for the help!

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