Portfolio Risk and Return

Presented by
MD. MOFIZAR RAHMAN
ID-601106

Group-C
Md.

Mofizar Rahman, ID-E-601106

S.M. Tauhid-Ul Islam, ID-E-601125
Md. Hbibullah Belali, ID-E-601127
Farjana Haque,
ID-E-601134
Shirina Khatun,
ID-E-601139
Sadhan Kumar Sardar ID-E-601147

What is portfolio?
A

Portfolio is the collection of securities

or asset.

If

you owned some Grameen Phone

Stocks, some Beximco Stocks, some
SCB stocks, you will be holding a threestock portfolio.

Portfolio Risk
Variance,

2
port

= w + wi w j Covij
i =1

2
i

2
i

i =1 j =1

where, 2port = Portfolio variance;

Wi = weights of the individual assets in the portfolio.
2i = The variance of rates of return for asset i
Covij = covariance between the rates of return for asset
i and j
S tan dard Deviation, port =

w +w
i =1

2
i

2
i

i =1 j=1

w j Cov ij

Covariance of Returns

A measure of the degree to which two

variables move together relative to their
individual mean values over time.

For two assets, i and j, the covariance of rates

of return is defined as:

Covij = E{[Ri - E(Ri)][Rj - E(Rj)]}

Correlation Coefficient

It can vary only in the range +1 to -1.

A value of +1 would indicate perfect positive

correlation. This means that returns for the two assets
move together in a completely linear manner.

A value of 1 would indicate perfect correlation. This

means that the returns for two assets have the same
percentage movement, but in opposite directions

Example : Two Security Portfolio Risk

Monthly
Return

Asset-1

Asset-2

Asset-1

Asset-2

Asset-1

Asset-2

(R1)

(R2)

R1 E(R1)

R2 E(R2)

[R1 E(R1)][ R2 E(R2)]

Jan-11

1.23

-0.22

0.6442

-0.7333

-0.4724

Feb-11

1.02

0.58

0.4342

0.0667

0.0289

Mar-11

0.47

0.94

-0.1158

0.4267

-0.0494

Apr-11

1.19

0.42

0.6042

-0.0933

-0.0564

May-11

0.91

0.76

0.3242

0.2467

0.0800

Jun-11

0.27

0.37

-0.3158

-0.1433

0.0453

Jul-11

-0.18

0.87

-0.7658

0.3567

-0.2731

Aug-11

0.81

-0.5858

0.2967

-0.1738

Sep-11

0.86

0.65

0.2742

0.1367

0.0375

Oct-11

0.14

0.52

-0.4458

0.0067

-0.0030

Nov-11

0.53

0.12

-0.0558

-0.3933

0.0220

Dec-11

0.59

0.34

0.0042

-0.1733

-0.0007

E(R1) = 0.5858

E(R2) = 0.5133

Sum = - 0.8152

Example : Two Security Portfolio Risk

S tan dard Deviation,

= w2 2 + w2 2 + 2w w Cov
port
1 1
2 2
1 2 1,2

Cov1, 2 = r12 1 2 = E[ R1 E ( R1 )][ R E ( R2 )]

Here,

COV1,2 = -0.8152/12 = -0.0679;

1 = 0.4466;
2 = 0.3206
r12 = COV1,2/(1 2 ) = -0.0679/(0.44660.3206) = -0.4745
If the both the assets have the equal weight in the portfolio then portfolio
return and risk is
E(Rport) = 0.5(0.5858) + 0.5(0.5133) = 0.5496 = 54.96%

port = (0.5) 2 (0.2176) + (0.5) 2 (0.1121) + 2 (0.5) (0.5) (0.0679)

= 0.2201 = 22.01%

Portfolio Standard Deviation

Any asset of a portfolio may be described by two

characteristics:
The expected rate of return
The expected standard deviations of returns
The correlation, measured by covariance, affects the portfolio
standard deviation
Negative or low correlation reduces portfolio risk while not
affecting the expected return
Combining two assets with -1.0 correlation reduces the
portfolio standard deviation to zero only when individual
standard deviations are equal

Portfolio Risk and Return with

Changing Correlations
Stock

E(Ri)

Wi

0.10

0.5

0.0049

0.07

0.20

0.5

0.0100

0.10

E(Rp) = 0.500.10 + 0.500.20 = 0.15 = 15%

Case

Correlations

Covariance

Portfolio Risk

+ 1.00

0.0070

0.08500

+ 0.50

0.0035

0.07399

0.06100

- 0.50

- 0.0035

0.04440

- 1.00

- 0.0070

0.01500

THANKS TO ALL