A Short Cut Formula for the Risk of a Portfolio Assignment Help

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A Portfolio is a gathering of investments either individual in nature or held by a company. It consists of a collection of assets like bonds, stocks, cash, etc. They are managed by professionals or directly occupied by investors. The investor may invest in various businesses to make sure his risks are diversified.

For example, a portfolio can be thought of like a cake where the pieces represent different asset classes like real estate, gold and silver, exchange-traded funds, mutual funds, treasury bills, etc.

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Portfolio Risk and Return

Every investment in a portfolio can cause a loss. Risks are greater if the investment promises a very high rate of return. So it is important to diversify your risk and maximize your return.

The combination of safety and risk is dependent upon the investor’s tolerance for risk. So it is important to compute the expected return on investment, the standard deviation, and variance of the portfolio.

• Expected Return-It is the average of the expected return of the stock held in investment.
• Portfolio Variance and Standard Deviation-It shows how much deviation can happen in return of the assets and also how much the investments in the portfolio vary with each other.

Shortcut formula for the risk of a portfolio

The portfolio variance is significant to measure the market risk in the portfolio.But the risk calculation is a very laborious construction of the variance matrix which uses a weighted series of averages of returns.So a shortcut solution is required to derive the risk inherent in an efficient manner.The variance equation is Variance (MX+NZ) =M2Variance(X)+N2Variance(Y)+2MNCovariance(X,Z),where M and N are the weights associated.

While providing A Short Cut Formula for the Risk of A Portfolio Assignment help, our experts try providing short cut methods to make things easier for you. The short cut deals with the left-hand side of the equation, which is the Variance of the average of the Variables in the portfolio. If (MX+NZ= W) then all we need is the Variance of W.

Therefore, W is the portfolio return series and by calculating the Variance of W, and square rooting the result and applying the required multiplier factor which represents the confidence level and holding period we arrive at the simple moving average variance-covariance result. We have to use variance and covariance functions simultaneously to have no deviation in actual results.

Again in the RHS of the equation, we can use M2 Variance (X) + N2 Variance (Y) + 2MN Correlation (X,Y) Standard Deviation (X) Standard Deviation (Y) as Correlation(X,Y) =Covariance (X,Y)/Standard deviation (X) Standard deviation(Y)].

Learn how to manipulate the variance covariance functions in excel with our A Short Cut Formula for the Risk of a Portfolio Homework Help.

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