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Portfolio Management
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2. Expected Return & Risk
Investment objectives
Return Risk
It specifies whether the investor looking Amount of risk the investor can bear
for capital preservation or capital (measured in term of standard deviation)
appreciation or regular income
Two Asset Portfolio: Two Asset Portfolio:
E(Rp) = wAE(RA) + (1-wA)E(RB) σp = wA2σA2 + wB2σB2 + 2 wAwB σAσBρAB
(SD)
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3. Concept Checker
 Consider a portfolio with $30,000 in Equity and 20,000 in Bonds. The Correlation
between the two asset classes is 0.7. Given the data below, the expected return and risk
of the portfolio is:
Investme Standard
Assets Return
nt Deviation
30000 Equity 13% 20%
20000 Bond 10% 10%
A. 12% & 14.2%
B. 11.8% & 15.07%
C. 11.8% & 14.2%
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4. Answer
 B
 Weight
Equity = 30000/50000 =60%
Bond = 1- 60% = 40%
Expected Return E(Rp) = 0.6 * 13% + 0.4 * 10% = 11.8%
σp  (0.6 2 * 0.2 2 )  (0.4 2 * 0.12 )  (2 * 0.6 * 0.4 * 0.2 * 0.1* 0.7)
 0.0144  0.0016  0.00672
 0.02272
 0.1507
 15.07%
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