Question

8. How are the expected return and risk of a portfolio calculated?

Answer 1

The expected return on the investment is the expected value of the probability distribution of possible return it can provide to investors.

Expected return is calculated by multiplying potential outcomes by the chances of outcome occurring, and then calculating the some of those results.

Expected return= R_{​​​​​​}​​​​​​1P1+R2P2+.......+RNPN where,

R= return expections.

P= probability of the return

N= scenerio number

Thus expected return of portfolio is calculated as above.

The risk of portfolio is measured using the standard deviation of the portfolio. However the standard deviation of the portfolio will not be simply the weighted average of the standard deviation of the two assets