Assessing Portfolio Risk and Return

This video covers the following learning objectives:

• Calculate expected return for individual assets using probability-weighted outcomes.

• Calculate portfolio expected return using asset weights and individual expected returns.

• Measure return deviation and squared deviation from the mean for each scenario.

• Calculate variance using scenario probabilities and squared deviations.

• Determine standard deviation as a measure of asset return volatility.

• Compute covariance to evaluate how two asset returns move together.

• Calculate correlation coefficient to understand the strength and direction of the relationship between two asset returns.

• Interpret statistical relationships between assets in the context of portfolio construction.

• Define portfolio standard deviation (σₚ) as a measure of total portfolio risk.

• Calculate portfolio standard deviation for a two-asset portfolio using weights, individual standard deviations, and correlation.

• Explain the role of correlation (ρ) between assets in determining portfolio risk.

• Demonstrate how diversification reduces portfolio risk, particularly when asset correlation is less than +1.

• Interpret the relationship between portfolio standard deviation and weighted average risk, emphasizing why portfolio risk is often lower than individual asset risks.

• Apply the standard deviation formula to real-world investment portfolios using Excel or a financial calculator.

• Apply these concepts to real-world certifications, including:

  • Canadian Securities Course (CSC)

  • CFA Level I

  • Financial Risk Manager (FRM) Part I

  • Certified Financial Planner (CFP)