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By STEVEN NICKOLAS
Updated Oct 8, 2020
Expected Return vs. Standard Deviation: An Overview
Expected return and standard deviation are two statistical measures that can be
used to analyze a portfolio. The expected return of a portfolio is the anticipated
amount of returns that a portfolio may generate, whereas the standard deviation
of a portfolio measures the amount that the returns deviate from its mean.
KEY TAKEAWAYS
For example, a portfolio has three investments with weights of 35% in asset A,
25% in asset B, and 40% in asset C. The expected return of asset A is 6%, the
expected return of asset B is 7%, and the expected return of asset C is 10%.
Standard Deviation
Conversely, the standard deviation of a portfolio measures how much the
investment returns deviate from the mean of the probability distribution of
investments.
Where:
Expected return is not absolute, as it is a projection and not a realized return.
[√(0.5² * 0.22 + 0.5² * 0.32 + 2 * 0.5 * 0.5 * 0.2 * 0.3 * 0.4)] = 21.1%