Question

When calculating the risk and return of a 2 or 3 stock portfolio, what are the statistical components that you should take into account and why?  

Answer 1

Statistical components to be taken into account while calculating return of portfolio:

1) risk free rate(rf)

2)beta(b)

3)market risk(rm)

4)weight(w)

Formula of expected return(rj) of security:

rj=rf+b(rm-rf)

Formula of portfolio return:

Portfolio return=rj1*w1+rj2*w2+rj3*w3 and so on.

Statistical components to be taken into account while calculating risk of portfolio:

1)standard deviation(sd) of each security

2)Weights(w)

3)Covariyance  between the returns of two securities(covab)

formula of portfolio risk(portfolio sd)=

(SDa)2 * (Wa)2 + (SDb)2 * (Wb)2 + [2 * SDa * Wa * SDb * Wb * Covab]