Analyzing portfolio return questions

Analyzing portfolio return questions
2. What is portfolio return?
• It is the weighted average of expected returns from different investments in the
portfolio. In terms of an equation:
3. What is risk? How is it measured?
• Risk is volatility in returns. It is shown by variance or standard deviation. Standard
deviation is the square root of variance. In terms of an equation:
σ 2 (Var.) =
Px(Ax – A ) 2
4. What is portfolio risk?
• Portfolio risk is the weighted average of risk present in different investments in
the portfolio. In terms of an equation:
σ p = [w1
2 Var A1 w22 Var A2 2(w1) (w2) (Cov A1, A2 )] 1/2
5. What is co-variance?
• It is the relationship between the movement of two sets of returns. In terms of an
Cov(A1, A2) =

P t(A1t – A 1 ) (A2t – A 2)
6. What is correlation co-efficient?
• It is the co-variance divided by the product of standard deviation of two sets of
returns. In form of an equation:
1 2
,CovA A
ρ σ

7. Distinguish between systematic and unsystematic risk.
• Systematic risk, shown through beta, represents risk of the total market portfolio.
Unsystematic risk is the firm-specific risk. While the latter can be reduced through
diversification, the former cannot be.
8. What is Beta?
, M
covA A
β = σ
9. How is the required rate of return of a particular investment computed?
A1 = Af
β1( A M – Af)
10. What is security market line?
• It is the line joining the risk-free returns with the returns from risky investments
in the mark
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