FRM金程FRM Easy Sheet

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Risk and Return of Portfolios of Risky Assets

For a portfolio of N securities, the expected portfolio return is:

The variance of returns for a portfolio of two risky securities is not a simple weighted average of the variances of the two securities. It depends on how the returns on the securities move together, which is measured by the covariance of the returns on the two securities.

since

variance can also be written as:

Diversifiable and Systematic Risk

The part of the volatility of a single security’s return that is uncorrelated with the volatility of the market portfolio is that security’s diversifiable risk.

The part of an individual security’s risk that arises because of the positive covariance of that security’s returns with overall market returns is called its systematic risk.

A standardized measure of systematic risk is beta: