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Return and Risk on 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.

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