Professional Documents
Culture Documents
Portfolio Return and Risk
Portfolio Return and Risk
Portfolio Return and Risk
1.Portfolio return
Portfolio return is the overall return on the entire portfolio. For example : A portfolio comprises two securities a 40% and security b 60%. If the return on security a is 8 % and b 6% then portfolio return will be: !40% " 8%# $ !60%"6%# % 6.8% &he above can be 'iven by the formula: R p= X a R a X b R b (here )p % portfolio return "a% proportion for security a "b% proportion for security b )a % return on security a )b% return on security b &hus the portfolio return is the wei'hted avera'e return of the returns in the individual securities.
2. Portfolio risk
Risk measurement in a two security portfolio
portfolio based
Portfolio risk is measured by the following formulae: A) (hen securities are not perfectly correlated:*
p = [ X a a , X b b , ,"a X b a b ]
(here - % standard deviation of return on the portfolio - a % standard deviation of return on security a - b % standard deviation of return on security b - ab% covariance of return on security a and security b "a% proportion for security a "b% proportion for security b In the above e.ample if -a% 0.,% -b% 0./% and -ab !covariance ab# % 0% what would be the ris12
!)a# !)b#
standard deviation of security a % 0.,% !- a# standard deviation of security b % 0./% !- b# 4orrelation coefficient is : $+ 0 and *+
5ifferent levels of security in the portfolio are: ,0% 00% 60% 60% and +00%. Solution: Portfolio returns for different levels of security a and b
Proportion of securities in the portfolio 7ecurity a !)a 6%# !"a# !"b# 0.00 0.,0 0.00 0.60 0.60 +.00 +.00 0.60 0.00 0.40 0.,0 0.00 0 +.00 /.00 /.60 4.00 6.00
Portfolio risk for different levels of security a and b Proportion of securities "a 0.00 0.,0 0.00 0.60 0.60 +.00 "b +.00 0.60 0.00 0.40 0.,0 0.00 ! 0./0 0.,8 0.,0 0.,4 0.,/ 0.,0 4orrelation co*efficient " 0./0 0.,/ 0.+8 0.+6 0.+6 0.,0 #! 0./0 0.+8 0.00 0.00 0.08 0.,0
8. A portfolio consistin' of two assets A and 9 has overall e.pected return of 6.8%. Assets A and 9 have wei'hta'e of 40% and 60% respectively. If the return on asset 9 is 8% find out the return on Asset A..