Chapter Summaries
8.1 Calculate the expected rate of return and volatility for a portfolio of investments and describe how diversification affects the returns of a portfolio of investments. (pgs. 224–233)
Summary:
A portfolio is a combination of several individual investments. The expected rate of return of a portfolio is calculated as a weighted average of the expected rates of return of the individual investments. However, the calculation of the risk of a portfolio (which is reflected in the volatility of the portfolio returns) is more complicated because diversification can influence the overall volatility of the portfolio returns. Consequently, when we compute the portfolio variance or its square root, the standard deviation, we must consider ...
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