Los 5.a

Question 1

How do you calculate the expected value of a portfolio return

Answer 1

Market value of investment in asset i / market value of the portfolio

Question 2

How do you workout the covariance of a portfolio return? What are it’s main properties?

Answer 2

Covariance is written in terms of the covariance of the return between two assets:
Callculation: CovA1,A1 = E((A1-E(A1)(A2-E(A2))
Covariance of a random variable with itself is it’s variance
It can range from positive infitiniy to negative infitinity
Positive covariance means that when one variable is above it’s mean, so is another, vice versa for opposite

Question 3

How do you workout sample covariance

Answer 3

(Observation A1 -mean return A1)(Observation A2 -mean return A2) / n-1