In this video, I discuss standard deviation and expected return of portfolio. The Standard Deviation is a measure of how spread out numbers are. Its symbol is σ (the greek letter sigma). The basic expected return formula involves multiplying each asset's weight in the portfolio by its expected return, then adding all those figures together.
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Prerequisite:
• Chapter 5: Risk, Return and the Histo...
Scenario Analysis and Probability Distributions
When we attempt to measure risk, we begin with the question: What holding-period returns (HPRs) are possible, and how likely are they? A good way to approach this question is to devise a list of possible economic outcomes, or scenarios, and specify both the probability of each scenario and the HPR the asset will realize in that scenario. Therefore, this approach is called scenario analysis. The list of possible HPRs with associated probabilities is the probability distribution of HPRs. Consider an investment in a broad portfolio of stocks, say, a stock index fund.
scenario analysis
Process of devising a list of possible economic scenarios and specifying the likelihood of each one, as well as the HPR that will be realized in each case.
probability distribution
List of possible outcomes with associated probabilities.
The probability distribution lets us derive measurements for both the reward and the risk of the investment. The reward from the investment is its expected return, which you can think of as the average HPR you would earn if you were to repeat an investment in the asset many times. The expected return also is called the mean of the distribution of HPRs and often is referred to as the mean return
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