Return and Risk of a Portfolio¶

Portfolio Return¶

Portfolio return is the overall gain or loss achieved by a combination of investments held in an investor's portfolio over a specific period. It reflects the cumulative financial outcome of all investment activities and decisions within the portfolio.

Components of Portfolio Return:¶

Capital Gains: Increases in the value of the portfolio's assets.
Dividends and Interest Payments: Income received from equity and debt investments respectively.
Foreign Exchange Gains: Gains derived from the fluctuation in exchange rates if the portfolio holds foreign assets.

Calculating Portfolio Return:¶

Weighted Average: The return of each asset is weighted by its proportion in the portfolio.
Total Portfolio Return: \(Portfolio Return (R_p) = ∑(w_i * r_i)\)

Where \(( w_i )\) represents the weight of each asset in the portfolio, and \(( r_i )\) is the return of each asset.

Portfolio Risk¶

Portfolio risk refers to the potential variability in returns of a portfolio and the likelihood of losses. It is an essential concept in finance, reflecting the uncertainty and the potential for investment value to vary.

Types of Portfolio Risk:¶

Systematic Risk: Risk inherent to the entire market or market segment, which cannot be eliminated through diversification.
Unsystematic Risk: Risk specific to a particular company or industry, which can be mitigated through diversification.

Calculating Portfolio Risk:¶

Total Portfolio Risk: \(Portfolio Risk (σ_p) = sqrt{ ∑(w_i^2 * σ_i^2)}\)

Where \(( w_i )\) represents the weight of each asset in the portfolio, and \(( σ_i )\) is the risk(standard deviation) of each asset.

Ask Hive Chat

Hive Chat

Hi, I'm Hive Chat, an AI assistant created by CollegeHive.
How can I help you today?

🎶