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In: Finance
How do you measure the expected return & risk of a portfolio? How the concept of...
How do you measure the expected return & risk of a portfolio? How the concept of correlation between asset returns is used in portfolio diversification? Explain.
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Expert Solution
The portfolio manager use scenario analysis for calculate expected return and standard deviation (Risk) of a portfolio. the portfolio manager assign different return in different economic scenario and probablities of each scenario. Based on expected return in each scenario and probabilities of each scenario, expected return and standard deviation is calculated.
Portfolio is a set of investment in different financial assets. Portfolio is risk is measured by standard deviation of portfolio return over the period. all the assets included in portfolio has their own risk. So, to construct the optimal risky portfolio the portfolio manager chooses assets whose correlation with portfolio is minimum that is minus one.
Risk of single assets is also measured in term of standard deviation only. the portfolio manager determines the correlation of assets and portfolio to construct optimal risky portfolio.
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