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.

Expected Return
Standard Deviation
Expected return measures the mean, or expected
Conversely, the standard deviation of a portfolio
value, of the probability distribution of investment
measures how much the investment returns deviate
returns. The expected return of a portfolio is calculated
from the mean of the probability distribution of
by multiplying the weight of each asset by its expected
investments.
return and adding the values for each investment.
The standard deviation of a two-asset portfolio is
For example, a portfolio has three investments with
calculated as:
weights of 35% in asset A, 25% in asset B, and 40% in
asset C. The expected return of asset A is 6%, the
σP = √(wA2 * σA2 + wB2 * σB2 + 2 * wA * wB * σA * σB *
expected return of asset B is 7%, and the expected
ρAB)
return of asset C is 10%.
Where:
Asset Weight Expected Return
A 35% 6%
σP = portfolio standard deviation
B 25% 7%
wA = weight of asset A in the portfolio
C 40% 10%
wB = weight of asset B in the portfolio
Therefore, the expected return of the portfolio is
σA = standard deviation of asset A
σB = standard deviation of asset B; and
[(35% * 6%) + (25% * 7%) + (40% * 10%)] = 7.85%
ρAB = correlation of asset A and asset B
Expected return is not absolute, as it is a projection and
This is commonly seen with hedge fund and mutual
not a realized return.
fund managers, whose performance on a particular
For example, consider a two-asset portfolio with equal
stock isn't as important as their overall return for their
weights, standard deviations of 20% and 30%,
portfolio.
respectively, and a correlation of 0.40. Therefore, the
portfolio standard deviation is:

[√(0.5² * 0.22 + 0.5² * 0.32 + 2 * 0.5 * 0.5 * 0.2 * 0.3 * 0.

4)] = 21.1%