MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 4.1
Expected Return of a Portfolio
As a first step in portfolio analysis, an investor needs to specify the list of securities eligible for selection or inclusion in the portfolio. Next he has to generate the risk-return expectations for these securities. These are typically expressed as the expected rate of return (mean) and the variance or standard deviation of the return.
Expected Return of a Portfolio
As a first step in portfolio analysis, an investor needs to specify
the list of securities eligible for selection or inclusion in the portfolio.
Next he has to generate the risk-return expectations for these securities.
These are typically expressed as the expected rate of return (mean) and the
variance or standard deviation of the return.
The expected return of a portfolio of assets is simply the weighted
average of the return of the individual securities held in the portfolio. The
weight applied to each return is the fraction of the portfolio invested in that
security.
Let us consider a portfolio of two equity shares P and Q with
expected returns of 15 per cent and 20 per cent respectively.
If 40 per cent of the total funds are invested in share P and the
remaining 60 per cent, in share Q, then the expected portfolio return will be:
(0.40 x 15) + (0.60 x 20) = 18 per cent
The formula for the calculation of expected portfolio return may be
expressed as shown below:
Where,
