Portfolio diversification, Risk, and review of portfolio math

Portfolio math

As we all know the expected return on a portfolio is merely the weighted average of the expected returns of the stocks in the portfolio.  (Remember the weights are based on the market values.)  This is not the case with the variance.   Here we must incorporate how the assets move together. 

As there was some confusion over how to calculate the variance of a portfolio, I have put a copy of some notes on my office door.  Remember to be careful and read the question.  Standard deviation is the square root of the vaiance. 

I also have placed an Excel file that can be used to calculate the portfolio variance for a three asset portfolio.  It is rather simple but might help in understanding the calculations.  I would definitley know how to calculate the variance for an n-asset portfolio for the test.

Additionally here are some notes on how to calculate the standard deviations for assets when you do not have historical returns (much like the 1st case).

07/19/99