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Risk and Return Formulae
Risk and Return Formulae
Risk and Return Formulae
Portfolio Return (𝑅 ) 𝑅 = 𝑊𝑅
𝜎 = 𝑊 𝜎 + 𝑊 𝜎 + 2𝑊 𝑊 𝜎
𝜎 = 𝑊 𝜎 + 𝑊 𝜎 + 2𝑊 𝑊 𝜌 𝜎 𝜎
𝜎 = (𝜎 ) + (𝜎 )
Variance (𝜎 ) of equal-weighted
portfolio
Rearranging the above equation, 𝜎 = (𝜎 − 𝜎 ) + (𝜎 )
(𝑅 − 𝑅 )
Sharpe’s Ratio
𝜎
(𝑅 − 𝑅 )
𝐸(𝑅 ) = 𝑅 + 𝜎
𝜎
Capital Market Line Returns (𝑅 ) (or)
𝜎
𝐸 (𝑅 ) = 𝑅 + (𝑅 − 𝑅 )
𝜎
Security Market Line Returns (𝑅 ) E (𝑅 ) = 𝑅 + 𝛽 (𝑅 − 𝑅 )
Alpha = Actual Rate of Return – Expected Rate of Return
Security Alpha (𝛼 )
𝛼 = 𝑅 − [𝑅 + 𝛽 (𝑅 − 𝑅 )]
Security Variance = Systematic Risk + Unsystematic Risk
Security Variance (𝜎 ) - decomposition 𝜎 = 𝛽 𝜎 + 𝜎
into systematic and unsystematic risk (or)
𝜎 = 𝜌 𝜎 + 𝜎