- CFA Level 2: Portfolio Management – Introduction
- Mean-Variance Analysis Assumptions
- Expected Return and Variance for a Two Asset Portfolio
- The Minimum Variance Frontier & Efficient Frontier
- Diversification Benefits
- The Capital Allocation Line – Introducing the Risk-free Asset
- The Capital Market Line
- CAPM & the SML
- Adding an Asset to a Portfolio – Improving the Minimum Variance Frontier
- The Market Model for a Security’s Returns
- Adjusted and Unadjusted Beta
- Multifactor Models
- Arbitrage Portfolio Theory (APT) – A Multifactor Macroeconomic Model
- Risk Factors and Tracking Portfolios
- Markowitz, MPT, and Market Efficiency
- International Capital Market Integration
- Domestic CAPM and Extended CAPM
- Changes in Real Exchange Rates
- International CAPM (ICAPM) - Beyond Extended CAPM
- Measuring Currency Exposure
- Company Stock Value Responses to Changes in Real Exchange Rates
- ICAPM vs. Domestic CAPM
- The J-Curve – Impact of Exchange Rate Changes on National Economies
- Moving Exchange Rates and Equity Markets
- Impacts of Market Segmentation on ICAPM
- Justifying Active Portfolio Management
- The Treynor-Black Model
- Portfolio Management Process
- The Investor Policy Statement
Expected Return and Variance for a Two Asset Portfolio
Expected Return for a Two Asset Portfolio
The expected return of a portfolio is equal to the weighted average of the returns on individual assets in the portfolio.
- = expected return for the portfolio
- = proportion of the portfolio invested in asset 1
- = expected return of asset 1
Expected Variance for a Two Asset Portfolio
The variance of the portfolio is calculated as follows:
- = covariance between assets 1 and 2
- ; where ρ = correlation between assets 1 and 2
The above equation can be rewritten as:
Keep in mind that this is the calculation for portfolio variance. If a test question asks for the standard deviation then you will need to take the square root of the variance calculation. Percentage values can be used in this formula for the variances, instead of decimals.
Example
The following information about a two stock portfolio is available:
Stock A | Stock B | |
---|---|---|
Amount | 20,000 | 30,000 |
Expected Returns | 12% | 20% |
Standard Deviation | 20% | 30% |
Correlation | 0.25 |
The weights for the two assets are:
Expected Variance for a Three Asset Portfolio
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