Calculating Portfolio Return and Risk with Asset Weights and Correlations
Summary
The document explains how to calculate a portfolio’s expected return as the weighted sum of the assets’ expected returns. It describes portfolio standard deviation as a function of each asset’s weight and volatility, together with the correlations between asset returns. Correlation ranges from negative to positive, affecting how much diversification changes overall risk.
A two-asset illustration uses stated weights, expected returns, volatilities, and a correlation of 0.5. It reports a portfolio return of 9.6% and risk of about 10.39%, and includes a short calculation example. The article is repeated several times, and the displayed general risk formula is missing or garbled in parts of the text. The method also relies on input estimates for returns, volatility, and correlation; it does not explain how to estimate them or address time horizons, changing correlations, or other portfolio risks.
Key ideas
- Portfolio expected return is the sum of each asset’s expected return multiplied by its portfolio weight.
- Portfolio standard deviation depends on asset weights, individual volatilities, and pairwise return correlations.
- Lower correlation between assets can reduce portfolio risk relative to the assets’ individual risks.
- The example reports a 9.6% expected return and approximately 10.39% risk for its two-asset portfolio.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.