Reading 49-Portfolio Risk & Return Part 1

Portfolio Management
Portfolio Risk & Return: Part I

Study Session 17
Reading No – 49
Version 2022
Learning Outcome Statements
The candidate Should be able to:
• a. calculate and interpret major return measures and describe their appropriate uses;
• b. compare the money-weighted and time-weighted rates of return and evaluate the performance of portfolios
based on these measures;
• c. describe characteristics of the major asset classes that investors consider in forming portfolios;
• d. calculate and interpret the mean, variance, and covariance (or correlation) of asset returns based on historical
data;
• e. explain risk aversion and its implications for portfolio selection;
• f. calculate and interpret portfolio standard deviation;
• g. describe the effect on a portfolio’s risk of investing in assets that are less than perfectly correlated;
• h. describe and interpret the minimum-variance and efficient frontiers of risky assets and the global minimum-
variance portfolio;
• i. explain the selection of an optimal portfolio, given an investor’s utility (or risk aversion) and the capital allocation
line.
www.mentormecareers.com
All Rights Reserved -Mentor Me Careers
Los a: Types and Approaches to calculate
returns
Approaches to Calculation
Types of
Return
Single Period
Price Averaging Multiple Period Returns

Income
Appreciation
Compounded Returns
Los a: Holding Period (Single Period)
An investor purchased 100 shares of a stock for $34.50 per share at the beginning of
the quarter. If the investor sold all of the shares for $30.50 per share after receiving a
$51.55 dividend payment at the end of the quarter, the holding period return is closest
to:
Look at this example: So the purchase price = $34.5 , Selling Price:$30.50

Which means the price gain =(30.5-34.5)= $4 x 100 Shares
Income gain total= $51.55
Intuitively you want to check the ratio of : Selling Price+ Dividends/ Purchase price
Which means =(-400+51.55)/ 3450= -10.1%
Alternatively you could just take (3050+51.55)/(3450)-1 = -10.1%
Los a: Arithmetic Mean
Consider the above example: If you want to do a loose calculation you just add
(14%-10%-2%)/3= 0.67%
& Say that on an average every year the returns were 0.67%. The problem with
this approach is that , it ignores compounding. At a compounded level the return
is actually 0.182%
Los a: Geometric Mean
Lets now use compounding: Assume we invest
$1 Initially in 2008.
1. Year 1 $1 becomes $1 x(1+22%)= 1.22
2. Year 2 $1.22 becomes $1.22 x(1+(-
25%))=0.915
3. Year 3 $0.915 becomes 0.915x
(1+11%)=1.01565
Now lets use the holding period method or the
Pv and Future value expression:
=(1.01565/1)^(1/3)-1 ( Basically annualising

the 3 year to 1 year)
=0.52%
No need to remember the formula, remember

the logic. Btw this is also time weighted return
Los b: Money Weighted Return
Consider the same example in the last slide, the compounded method did solve for the
compounding issue but will it solve the problem of how much money we put across periods?
Investing Larger In Bad Times Investing Larger In Good Times
Investme Investme
Returns nt Value Returns nt Value
2007 1000 1000 2007 10000 10000
2008 22% 10000 11220 2008 22% 1000 13200
2009 -25% 1000 9415 2009 -25% 1000 10900
2010 11% 10000 20451 2010 11% 10000 22099
CAGR 0.52% CAGR 0.52%
The geometric or CAGR gives us the same return but the reality
is different. Hence the geometric mean doesn’t not consider the
amount of cash flows. So we another method, which is money
weighted or IRR.
Discussed in the next page…..
Los b: Money Weighted Return
Investing Larger In Good Times Investing Larger In Bad Times
Investme
How the heck can we consider cash Investme
Returns nt Value flows along with returns? Well good Returns nt Value
2007 10000 10000 2007 1000 1000
2008 22% 1000 13200
question, this where mathematics 2008 22% 10000 11220
2009 -25% 1000 10900 and spreadsheet can be useful. 2009 -25% 1000 9415
2010 11% 10000 22099 2010 11% 10000 20451
CAGR 0.52% CAGR 0.52%
1: We know that PV= FV/(1+r)^n 6: The logic here is can we find 10: don’t Worry lets take and
right? an average rate (r), that can example in the next slide
2: So how about we try to find equalise the Investment to All
the present value of each cash future cash flows?
flow to 2007? 7: That would also mean NPV?
3:Just a slight problem. We don’t 8: Hence the hypothetical rate
know the r (discounting rate). which can make NPV =0
4: Wait! Weren’t we trying to 9: Yes that would become our
find the r itself. Yes! IRR.
Los B: Running the Test
Hypothetical Rate 5%
Year Type Cash flow PV
0 Investment -100 -100
1 Returns-1 10 9.52381 More Trials
Trial 1 2 Returns-2 25 22.67574 NPV IRR Line
3 Returns-3 75 64.78782 20.00
4 Returns-4 14 11.51783 Trails NPV 2.0%
NPV 8.505201 2.0% 17.44 15.00 3.0%

Hypothetical Rate 6% 3.0% 14.35 5.0%
10.00
Year Type Cash flow PV 5.0% 8.51 6.0%
0 Investment -100 -100 6.0% 5.74 5.00 7.0%
1 Returns-1 10 9.433962 7.0% 3.08 0.00
0.00 8.0%
8.0% 0.52
Trial 2 2 Returns-2 25 22.24991
8.2% 0.00
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 8.2%
3 Returns-3 75 62.97145 -5.00
9.2% -2.45 9.2%
4 Returns-4 14 11.08931
NPV 5.744631 10.2% -4.82 -10.00 10.2%
11.2% -7.11 11.2%
Hypothetical Rate 8% -15.00
12.2% -9.31
Year Type Cash flow PV
0 Investment -100 -100
1 Returns-1 10 9.259259
Trial 3 2 Returns-2 25 21.43347
3 Returns-3 75 59.53742 Source:DATA SHEET
4 Returns-4 14 10.29042 The rate at which NPV=0
NPV 0.520566
Is IRR
Los b: Compare Time weighted Vs IRR( Money
Weighted) IRR
Year Activity Dividend $Share $ Qty Year Cashflow

0Purchase 1000 1 0 -1000
Dividend & Purchase 3 1 -3140
1 Shares 25 1055 3 2 4500
Rec dividend and sell all 6.91%
2 shares 100 1100 4
• The money weighted or the method in which we consider

Geometric Mean
the cash flow timings and calculate the hypothetical rate
gives us 6.91% Year Holding P %
• The holding method which ignores the cash flow timings or 0
the scale (amount) gives us 7.10% 1 8.00%
Why is there a difference because in geometric mean of the 2 14%
holding period case, we are assuming a single one time 7.10%
investment and no other activity, but in money weighted we are
considering additional cash flows too.
CFA Curriculum Question
At the beginning of Year 1, a fund has $10 million under management; it earns a return of 14% for the year. The
fund attracts another $100 million at the start of Year 2 and earns a return of 8% for that year. The money-
weighted rate of return is most likely:
A less than the time-weighted rate of return.
B the same as the time-weighted rate of return.
C greater than the time-weightedrate of return.
Solution
• If you really went ahead to calculate this, you wasted a lot of precious time. You really don’t want
to do that wasting in the exam.
Look at the data carefully.
1. Major investment happens on the year when the return was 8%
2. Lesser investment happens on the year when the return was at 14% or higher
3. In case of time weighted we assume single investment but in money weighted the larger
capital gets invested on lower return year at 8%. So money weighted return will obviously be
less than time weighted.
Btw answer is A.
Los a: Minor adjustments
1. Gross vs Net: Basically Gross means without the management or performance fees & Net means after. An
investor is always interested in net returns
2. Pre Tax vs Post Tax: Net returns after fees and after considering taxes( which can vary as per individual or
type of investments) For eg for equity mutual funds in India, there is capital gain of 10% but for trading
income(F&O) its 30%.
3. Real Returns: Consider a simple example: If I said I generated 15% net returns in my equity strategy net of
fees and taxes. That statement is incomplete, since I am interested in how much wealth increased after
accounting for inflation. Lets suppose inflation is 6% So I have two options to calculate real returns
1. 15% - 6%( Inflation)= 9% ( real)…….Is this really correct?
2. Wasn’t inflation after all a premium built into the 15% that I generated? Which is (1+r)= (1+rf) x (1+rp) x (1+inflation) ( Remember
Returns are Risk free+ n number of premiums like inflation, default etc). So if that is so the correct mathematic method is divide
(1+15%)/(1+9%)= 8.49%
data;
variance portfolio;
line.
Los c: Performance of Major Assets
I don’t really understand what exact point does the author in the curriculum want to convey in the LOS, except
looking at data which is fun but doesn’t really convey the performance of assets when just keep talking about equity.
The conclusion is that in the longer run equity has beaten inflation hands
The conclusion is that historical returns don’t necessarily mean down $1 becomes $1654. Party because the inflation is built in the
that next year will be positive. Everyone knows that. Did you? business products, if inflation is 10% next year, the price of products
would increase too right? But will that really happen for bonds? No
because higher inflation will lead to lower interest rates, and cheaper
money with a one time effect on the increase of bond prices
Los c: Basic Risk History
This is the Hierarchy for U.S
Small Cap Stocks
High Returns & Higher Risk You would be surprise to know that this
hierarchy is very different for India. In India
Large Cap • Large cap always outperformed small cap
and mid cap
Higher Risk & Return than Bonds • May be its because our markets are too
young, may be the country still needs to
Government Bonds still develop.
• Who knows but that’s the fact.
Higher Risk & Returns than Corporate Bonds • So that means if you invest in India the
usual high risk leads to higher return may
Corporate Bonds not actually be true, its low risk leads to
high return
High Risk & Return than Bills
Los e: Types of Risk Aversion
Risk Aversion
Risk Seeking Risk Neutrals Risk Averse
Seeks to take more An Equal % of loss or

They don’t exist
risk gain
Even if it doesn’t They don’t get The loss makes you

mean higher returns affected by risk at all feel worse
You might find them So you will avoid the

plenty. Majorly loss even if means
because of the lack of you could gain
knowledge equally
Los e: Utility Theory
I think this image explains it all. Can you really
say that everyone would be unsatisfied at pizza
slice 9?
• May be you would get satisfied and at slice 3
or may be 1
• Or you may have extreme satisfaction at slice
9 too. If you were really starving for 3 days.
It’s the same with portfolio returns too. No two
individuals can have the same utility or risk and
return trade-off.
1. Higher risk averse( more hungry) investors
require more pizza slices(to become
satisfied) or returns.
2. Low risk averse(less hungry) investors would
require less additional returns(slices) to get
satisfied.
This given by the below equation: Utlility is
Expected return – ½ (Risk aversion) x variance
So higher volatility means lower utility
Los e: Utility Curve
A risk averse investor is

unaffected by point A or B.
Point A Has less return and
lesser risk & point B is
more returns but equal
amount of higher risk.
• Notice that the higher the risk aversion the

more steep the curve or higher slope
• Also look at the risk seeking 5, as the risk
keeps increasing the person has more
utility
CFA curriculum Question
Answers
23:C
24:C
25:B
26:A
Los e: Application of Utility Curve
Characteristics Rf Risky Consider this simple example before looking at the giant ugly
formula. If you were to create a two asset portfolio, one being the
Return 4% 25% risk free asset with return of 4% and the other a risk asset lets say
St Dev 0 15% a stock with expected return of 25%. The weight is 75% in risk free
Weight 75% 25% and 25% in risky. Then it’s a simple weighted average to calculate
the return
Expected Return 9.25%
Now you want to calculate the st dev of the portfolio. How would you
Variance 0.141%
do that it won’t be a simple weighted average but a squared
St Dev 0.0375 calculation, since remember that variance is the squared deviation
Source:DATA SHEET from the mean
Which would mean
=(0.75)^2 x (0)^2 + (0.25)^2 x (0.15)^2 +2 x 0.75 x 0.25 x p(correlation) x 0.15 x 0.75
But st dev of risk free asset is 0 and the correlation is 0 too. So you get 0.141% now unsquared it( square root)= 3.75%
But there is alternative since the green part is already 0 and the red part too. So simply it becomes (weight of risky asset x St
Dev of risky asset)
So much for zero right! I can understand but when we have a non risk free asset then you wont forget that formula.
Los e: Application of utility curve
The ugly Formula.
But I hope you won’t have to remember it since you got the logic, I hope.
Los e: Capital Allocation Line
Now if we have some fun Capital Allocation Line
changing the weights of the risky 30.00%
and risk free asset and see
25.00%
• The expected return of the 25.00%
23.95%
22.90%
21.85%
portfolio 20.80%
19.75%
20.00% 18.70%
17.65%
• Expected st dev of the portfolio 16.60%
15.55%
14.50%
15.00% 13.45%
& Plot the heck out of it, which 12.40%
11.35%
we all finance geeks love to do, 10.00%
10.30%
9.25%
8.20%
cuz its art for us. Then this is 7.15%
6.10%
what it looks like 5.00%
5.05%
4.00%
Feel free to try the spreadsheet,

its nothing out of the world. 0.00%
0% 1% 2% 2% 3% 4% 5% 5% 6% 7% 8% 8% 9% 10% 11% 11% 12% 13% 14% 14% 15%
Each of those are portfolios

available to an investor
Source:DATA SHEET
Los e: Lets complicate Further
Remember we wrote
E(R)= 𝜔1 × 𝐸 𝑟 1 + 𝜔2 𝑥 𝐸 𝑟 2
How about we use our old equation 𝜎𝑝 = 1 − 𝑤1 𝑥 𝜎2 , lets try to re arrange to get 𝜔1
𝜎𝑝 𝜎𝑝
(1-𝜔1) = 𝜎2 or 𝜔1 = 1 − 𝜎2
Now add this in the green equation
𝜎𝑝 𝜎𝑝
E(R)=1 = (1 − 𝜎2) × 𝑅𝑓 + 𝜎2 𝑥 𝐸 𝑟 2
𝜎𝑝
Or 𝑅𝑓 + ( 𝐸(𝑟2 − 𝑟𝑓) ∕ 𝜎2
So the blue Rf is the intercept and the orange is the slope or (saying mathematically incremental return for
every incremental risk) of the capital allocation line.
Not bad actually, what mathematical re arrangements can do and the equation does look good
Los e: Just a thought!
Capital Allocation Line
30.00%
25.00%
25.00% 23.95%
22.90%
21.85%
20.80%
19.75%
20.00% 18.70%
Return
17.65%
16.60%
15.55%
14.50%
15.00% 13.45%
12.40%
11.35%
10.30%
9.25%
10.00% 8.20%
7.15%
6.10%
5.05%
5.00% 4.00%
0.00%
0% 1% 2% 2% 3% 4% 5% 5% 6% 7% 8% 8% 9% 10% 11% 11% 12% 13% 14% 14% 15%
Risk
Los e: Just a thought!
3 :You cannot move to yellow point
because it doesn’t exists or
Capital Allocation Line 1 unattainable. Since its above the
30.00%
2 3 capital allocation line. And similarly
the capital allocation line won’t
1:The orange dots basically are risk and return make sense 25.00%
25.00% 23.95%
trade off for curve 3 indifference curve 22.90%
21.85%
20.80%
19.75%
20.00% 18.70%
Return
17.65%
16.60%
15.55%
14.50%
15.00% 13.45%
12.40% ER
11.35%
10.30% Linear (ER)
10.00% 8.20%
9.25% 2 :Now observe the green point
6.10%
7.15% with the red point on curve 2. Any
4.00%
5.05% one would choose the red point or
5.00%
curve 2 because of high return for
same level of risk
0.00%
0% 1% 2% 2% 3% 4% 5% 5% 6% 7% 8% 8% 9% 10% 11% 11% 12% 13% 14% 14% 15%
Risk
Los e: Indifference curve for two types of
investors
Capital Allocation Line
30.00%
25.00%
25.00% 23.95%
22.90%
21.85%
Lower Risk Averse Investor 19.75%
20.80%
20.00% 18.70%
Return
17.65%
16.60%
15.55%
14.50%
15.00% High Risk Averse Investor 12.40%
13.45%
ER
11.35%
10.30% Linear (ER)
9.25%
10.00% 8.20%
7.15% Consider these two indifference curve, the lower risk investor has a lower
6.10%
5.05% risk coefficient and the higher risk averse investor has a higher risk
5.00% 4.00%
coefficient. Meaning the orange guys needs more return per unit risk to
move up. Hence the curve is more curvy or steep
0.00%
0% 1% 2% 2% 3% 4% 5% 5% 6% 7% 8% 8% 9% 10% 11% 11% 12% 13% 14% 14% 15%
Risk
1 :With respect to the mean–variance portfolio theory, the capital allocation line, CAL, is the combination of
the risk-free asset and a portfolio of all:
A risky assets.
B equity securities.
C feasible investments.
2:Two individual investors with different levels of risk aversion will have optimal portfolios that are:
A below the capital allocation line.
B on the capital allocation line.
C above the capital allocation line.
Solution
I have purposely not given the solution here because with the kind of
discussion we had, you need to get that answer right without looking at the
answer but if you still want it, look to the right hand corner below in very
small letters
1:a
2:b
data;
variance portfolio;
line.
Los d,f,g: Portfolio of Two Risky Assets
As before the portfolio return would be just the weighted average of
each assets return
As before the portfolio risk would be similarly be :
CFA Curriculum Question
Solution
Los d,f,g: Effect of Correlation over volatility
A B
Weights 50% 50%
SD Portfolio Returns 15% 20%
St Dev 30% 35%
0.12
Variance 0.09 0.1225
Weights
squared 0.25 0.25
0.1
SD
0.08 Correlation A & B Portfolio
1 0.105625
0.8 0.095125
0.06 0.6 0.084625
0.4 0.074125
Needless to say but lower
0.2 0.063625
0.04 correlation between two risky 0 0.053125
assets will reduce the overall -0.2 0.042625
-0.4 0.032125
0.02 SD of the portfolio -0.6 0.021625
-0.8 0.011125
0 -1 0.000625
-1.5 -1 -0.5 0 0.5 1 1.5
Los d,f,g: Effect of change of weights with
correlation
Weights Squared Effect of change of weights and correlation
SD 25% 1.5
A B Correlation A & B Portfolio ER A B
0% 100% 1 12% 20.0% 0 1
10.00% 90.0% 0.8 12% 19.5% 0.01 0.81 1
20.00% 80.0% 0.6 10% 19.0% 0.04 0.64 20%
30.00% 70.0% 0.4 9% 18.5% 0.09 0.49
40.00% 60.0% 0.2 7% 18.0% 0.16 0.36 0.5
50.00% 50.0% 0 5% 17.5% 0.25 0.25
15%
60.00% 40.0% -0.2 4% 17.0% 0.36 0.16
70.00% 30.0% -0.4 4% 16.5% 0.49 0.09 0
80.00% 20.0% -0.6 4% 16.0% 0.64 0.04
90.00% 10.0% -0.8 6% 15.5% 0.81 0.01 10%
100.00% 0.0% -1 9% 15.0% 1 0.00 -0.5
5%
Checkout how the SD of the portfolio keeps -1
reducing as the weights for asset b decreases

(which has higher historical sd) and the effect 0% -1.5
1 2 3 4 5 6 7 8 9 10 11
magnifies when the correlation goes from 1 to SD Portfolio ER Correlation A & B
-1
Los f,g: Portfolio of Many Risky Assets
The derivation of this is not important but the logic is
Given that all the weights of many risky

assets are equal and the variance and
covariance is average the second line
equation tells us that as the number of
assets increase, the contribution of each
assets individual variance becomes
smaller and smaller
Los c,g: Power of Diversification
Ok so I am not going just conclude the findings here instead of just talking about this on and on.
Some of which are interesting especially if you do think about investments in general
1. Returns can be different across periods, hence predicting returns can give you a false sense of
comfort
2. However risk and correlations between asset class and individually are stable. They don’t
change much. Equity indices have a drawdown of 60% and they always do.
3. Even correlations between asset classes are more or less stable. Gold and equity indices do
have a negative correlation
So my question to you is, what is for sure? Risk! What's not sure? Returns. So what you rather
manage? Risk or return? Trust me all the famous investors are risk managers. Manage the risk well,
returns are a by product.
Los c,g: How to diversify
1. Invest across asset classes: Not just equity
2. Invest in index funds: Index has more than 30 stocks which means the volatility of each will not
affect much( a caution here though, be careful because an index might have an overweight to
higher market cap stocks)
3. Diversify across countries
4. Don’t buy employer stock: You are already working in that company, which itself carriers the
risk, plus your investments are work in the same company too. Doesn’t sound very efficient.
Take your competitors stock if you can( Just kidding)
5. Evaluate assets: Calculate how much benefit you derive by adding that new asset in terms of
expected return and SD reduction
6. Buy Insurance for investments: Not famous in India but you could but if they do exist take, can
be handy when assets lose value
data;
variance portfolio;
line.
Los h: Efficient Frontier
1. If the assets are perfectly correlated then the capital allocation line is a straight line which we saw already but when its
not, it looks like this a bulgy curve like shown on the right. As we keep plotting the various portfolios, all the portfolios
to the right of the curve are possible.
2. As we keep adding more assets like the international sets more opportunity sets will emerge which are towards the left
with lower risk and higher return
Los h: Markowitz Efficient Frontier
1. Consider point X,A ,B. A risk averse investor would choose X but that’s
unattainable.
2. Hence he will have to move to because A gives the same level of return at
with lower risk
3. But look at point C, that’s the minimum variance for the return earned at
C
4. The entire collection of portfolios is called as the minimum variance
frontier
5. No investor will buy the portfolio to the right of the efficient frontier
because the efficient frontier would give the same level of return of the
risk to the right
6. The left most point on the efficient frontier is called as the global
minimum variance portfolio(Z)
7. Notice A & C, they both have same risk and any investor should choose A.
8. The portfolios to the right of the Z, is called as Markowitz efficient frontier
9. Also look at the slope as we keep moving across the slope from Z to A to D
the risk per unit keeps decreasing .
10. Which means that the increase in risk is the same between Z to A, as to A
to D
Los i: Risky free asset and Many Risky assets
• Note one thing that all the efficient frontier
portfolios can be combined with a risk free
asset
• Two combinations are discussed here CAL
A & CAL P
• You can see that point P dominates the
best option compared to point A in CAL A
• Also look at other options like point X
which has the highest return for given level
of risk and Y can be achieved by leveraging
the portfolio P
• Also notice that Point P is the optimal risky
portfolio anything above P and below P are
not optimal
Los i: Two fund Separation Theoram
The theorem states that all investors irrespective of the tastes, risk
aversion etc will hold a combination of risk free and risky asset. The
theorem divides the investment problem in two parts
1. Investment Decision: An investor finds the optimal portfolio along
the CaL(P) based on the risk preferences
2. Financinng decision: An individuals risk preference will finally
decide the leveraging or going beyond the X to Y in the previous
exhibhit diagram
Compared to the efficient frontier of risky assets, the dominant capital allocation line has higher rates of return
for levels of risk greater than the optimal risky portfolio because of the investor’s ability to:
A lend at the risk-free rate.
B borrow at the risk-free rate.
C purchase the risk-free asset.
With respect to the mean–variance theory, the optimal portfolio is determined by each individual investor’s:
A risk-free rate.
B borrowing rate.
C risk preference.
Solution
• B is correct. The CAL dominates the efficient frontier at all points except for the optimal risky portfolio. The
ability of the investor to purchase additional amounts of the optimal risky portfolio by borrowing (i.e.,
buying on margin) at the risk-free rate makes higher rates of return for levels of risk greater than the optimal
risky asset possible.
• C is correct. Each individual investor’s optimal mix of the risk-free asset and the optimal risky asset is
determined by the investor’s risk preference.
Summary
• Holding period return is most appropriate for a single, predefined holding period.
• Multiperiod returns can be aggregated in many ways. Each return computation has special applications for
evaluating investments.
• Risk-averse investors make investment decisions based on the risk–return trade-off, maximizing return for the same
risk, and minimizing risk for the same return. They may be concerned, however, by deviations from a normal return
distribution and from assumptions of financial markets’ operational efficiency.
• Investors are risk averse, and historical data confirm that financial markets price assets for risk-averse investors.
• The risk of a two-asset portfolio is dependent on the proportions of each asset, their standard deviations and the
correlation (or covariance) between the assets’ returns. As the number of assets in a portfolio increases, the
correlation among asset risks becomes a more important determinate of portfolio risk.
• Combining assets with low correlations reduces portfolio risk.
• The two-fund separation theorem allows us to separate decision making into two steps. In the first step, the
optimal risky portfolio and the capital allocation line are identified, which are the same for all investors. In the
second step, investor risk preferences enable us to find a unique optimal investor portfolio for each investor.
• The addition of a risk-free asset creates portfolios that are dominant to portfolios of risky assets in all cases except
for the optimal risky portfolio.

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Portfolio Management

Portfolio Risk & Return: Part I

Price Averaging Multiple Period Returns

Look at this example: So the purchase price = $34.5 , Selling Price:$30.50

=(1.01565/1)^(1/3)-1 ( Basically annualising

No need to remember the formula, remember

CAGR 0.52% CAGR 0.52%

Discussed in the next page…..

CAGR 0.52% CAGR 0.52%

NPV 8.505201 2.0% 17.44 15.00 3.0%

Year Activity Dividend $Share $ Qty Year Cashflow

• The money weighted or the method in which we consider

Risk Seeking Risk Neutrals Risk Averse

Seeks to take more An Equal % of loss or

Even if it doesn’t They don’t get The loss makes you

You might find them So you will avoid the

A risk averse investor is

• Notice that the higher the risk aversion the

Feel free to try the spreadsheet,

Each of those are portfolios

As before the portfolio risk would be similarly be :

reducing as the weights for asset b decreases

Given that all the weights of many risky

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Reading 49-Portfolio Risk & Return Part 1

Reading 49-Portfolio Risk & Return Part 1