# Read PDF Calculation of Portfolio Weights

Contents:

The term originates from the Markowitz Portfolio Theory, which suggests that volatility can be used to replace risk and, therefore, less volatility variance correlates with less investment risk. Andrew is a financial analyst, and he works at an advisory firm. Andrew calculates the standard deviation using the STDEV function in Excel and the annual return of each stock using the average return as follows:. Then, Alex calculates the correlation and covariance of stocks contained in the portfolio to construct an optimized portfolio that can minimize the risk.

He applies the correlation matrix in Excel to investigate the dependence between the stock returns, and he calculates the covariance using the VARP function in Excel to find the mean value of the returns for each stock as follows:.

Portfolio Theory: Calculating a Minimum Variance Two Asset Portfolio - Part 1

Investors should always go with a risk tolerance that they are comfortable with, both mentally and financially. The weight of a portfolio is simply the percent of an investment portfolio that is held by a single asset. Sounds simple enough, right? Let's think of the weight of a portfolio in terms of pizza slices. That calculation is an example of a portfolio weight by value. There are several ways the weight of a portfolio can be determined.

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## Expected Return Formula

The value calculation is the most basic and most used method. Other methods include cost, unit, sectors, and types of securities. Calculating the weight of a portfolio can be a very useful investment tool. The weight of a portfolio can tell investors how much of their portfolio performance is dependent on a particular asset. Now that we know how to calculate the weight of our portfolio, let's see how much we can make off of it.

### Accounting Topics

After building your portfolio and understanding the weight of each asset, you will probably want to know how well it will do. The expected return of a portfolio is the amount an investor anticipates he or she will receive on an investment. Expected return is a tool used to determine whether an investment portfolio will have a negative or positive average net income.

Now, this is just an expectation; it's not a guaranteed rate of return. Examining the potential performance of your portfolio will assist you in meeting your target goals and making any adjustments. To calculate the expected return of a portfolio, you will need to know the rate of return. The rate of return is the percentage of profit from an investment over a certain time period. Expected return is calculated by taking the average of the weight of all possible returns and multiplying it by the rate of return.

Sounds complicated, I know.

Let's break it down! The portfolio variance measures the risk of a portfolio and examines the co-variance and standard deviation of each asset. The co-variance measures how one investment in a portfolio moves in relation to another. The variance of a portfolio can tell investors the amount of risk they may take on for a particular investment. The formula for portfolio variance is used to compare two assets. Portfolio variance is calculated by multiplying the squared weight of each asset by its equivalent variance and adding two times the weight multiplied by the co-variance of two assets.

I know it sounds really complicated, so let's look at it in formula form. Designing a portfolio , a collection of financial assets or investments, can be challenging. Investors should always know their risk tolerance , which is the amount of risk they are able to handle when investing.

Investors should also know the portfolio asset's weight , the percentage of an investment portfolio that is held by a single asset. The higher the weight of the asset, the more you have tied into that particular asset. The expectation of any investment portfolio is to make a return. Expected return , or the amount one anticipates receiving on an investment, can be used as an estimate of how much you will make. The rate of return , or percent of profit from an investment over a period of time, is also used in the estimation.

Some assets may have a better rate of return than others. A portfolio variance is used to compare the actual returns of two assets. Understanding the weight, return, and variance of an investment portfolio can be very beneficial to investors. Always consult with a professional before attempting to invest. To unlock this lesson you must be a Study. Create your account. Already a member? Log In. Did you know… We have over college courses that prepare you to earn credit by exam that is accepted by over 1, colleges and universities.

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## Expected Return Formula | How to Calculate Portfolio's Expected Return?

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### Calculating Expected Portfolio Returns

Human Resource Management: Help and Review. Lesson Transcript. Instructor: Keocha Evans Keocha has taught college Accounting and Business courses, she has master's degree in Business accompanied by a Bachelors degree in Accounting. A portfolio can be designed in several different ways. It is important to understand the basics of a portfolio before building and managing one.