Risk and Return Formulae:

Securities Measure(s) Ex-post Ex-ante

∑ 𝑅
Mean Returns (𝑅 ) 𝑅 = 𝑅 = 𝑃𝑅
𝑛
(𝑅 − 𝑅 )
Variance (𝜎 ) 𝜎 = 𝜎 = 𝑃 (𝑅 − 𝑅 )
𝑛−1
Standard Deviation (𝜎 ) 𝜎 = 𝜎 𝜎 = 𝜎
𝜎 𝜎
Coefficient of Variation (CV)
𝑅 𝑅
Annualize Risk: Let’s say we have daily returns, then Annualized Standard Deviation = Standard
Deviation of Daily Returns * √365
Annualize Return: Let’s say we have 0.1% daily returns. Since there are 365 days in a year, the annual
returns will be calculated as: Annual returns = (1+0.001)365 – 1 = 44.02%.
(𝑅 − 𝑅 ) (𝑅 − 𝑅 )
Covariance (𝜎 ) 𝜎 = 𝑃 (𝑅 − 𝑅 ) (𝑅 − 𝑅 )
𝜎 =
𝑛−1
𝜎
Correlation Coefficient (𝜌 ) 𝜌 =
𝜎 ∗ 𝜎
Alternatively, Covariance (𝜎 ) 𝜎 =𝜌 𝜎𝜎
𝜎
Security Beta (𝛽 ) 𝛽 =
𝜎
Portfolio Measures

Portfolio Return (𝑅 ) 𝑅 = 𝑊𝑅

𝜎 = 𝑊 𝜎 + 𝑊 𝜎 + 2𝑊 𝑊 𝜎

Portfolio Variance (𝜎 ) (or)

𝜎 = 𝑊 𝜎 + 𝑊 𝜎 + 2𝑊 𝑊 𝜌 𝜎 𝜎

Standard Deviation (𝜎 ) 𝜎 = 𝜎
( )
𝑊 = and 𝑊 = (1 − 𝑊 )
( )
Minimum Variance Portfolio (or)
Weights (Two-Asset Case) ( )
𝑊 = and 𝑊 = (1 − 𝑊 )
( )

𝜎 = (𝜎 ) + (𝜎 )
Variance (𝜎 ) of equal-weighted
portfolio for two-assets case
Rearranging the above equation, 𝜎 = (𝜎 − 𝜎 ) + (𝜎 )
(𝑅 − 𝑅 )
Sharpe’s Ratio
𝜎
(𝑅 − 𝑅 )
𝐸(𝑅 ) = 𝑅 + 𝜎
𝜎
Capital Market Line Returns (𝑅 ) (or)
𝜎
𝐸 (𝑅 ) = 𝑅 + (𝑅 − 𝑅 )
𝜎
Security Market Line Returns (𝑅 ) E (𝑅 ) = 𝑅 + 𝛽 (𝑅 − 𝑅 )
Alpha = Actual Rate of Return – Expected Rate of Return
Security Alpha (𝛼 )
𝛼 = 𝑅 − [𝑅 + 𝛽 (𝑅 − 𝑅 )]

Risk and Return Formulae Sheet Dr. M V Narasimha Chary