Portfolio Theory

Question 1

How can we measure risk and return?

Answer 1

VAR equation is for risk, E(R) equation is for return

Question 2

What is a portfolio and when is it created?

Answer 2

It is created when an investor combines 2 or more assets

Question 3

How do you calculate portfolio returns?

Answer 3

Using the Rp,t=Sum of Wi,Ri,t

Where Wi is the proportion of wealth invested in asset i

Question 4

How do you calculate portfolio expected returns?

Answer 4

Using the E(Rp)=sum of WiE(Ri)

Question 5

How do you calculate portfolio return variance?

Answer 5

Using the VAR(Rp) equation

Question 6

What is the risk of a portfolio?

Answer 6

Depends on the individual risk (variance) of each asset and the way they interact (COV or CORREL)