Chapter 12, Problem 14P

Summary Introduction

Portfolio:

A portfolio is the total collection of the investments held by an investor, which includes bonds, stocks, options, futures, and other investments like gold or limited partnerships. Most portfolios are diversified to protect against the risk of single securities. So, portfolio analysis involves analyzing the portfolio as a whole.

The return of a portfolio is the weighted average of the return of its component assets. Portfolio risks can be calculated by considering the standard deviation of the variance of actual returns of the portfolio over time.

The Expected Return of a Portfolio refers to the weighted average of the expected returns on each individual investment in a particular portfolio. The expected return of a portfolio is hence related to the expected return of the stocks in a portfolio.

The Expected Return of a Portfolio can be calculated using the formula given below.

Where,

• is the expected return of portfolio.
• is the weight of the investment or stock.
• is the expected return of investment or stock.

To determine:

(a) The expected return (b) The volatility (standard deviation).