Author Topic: Portfolio Return Calculation  (Read 433 times)

hgjjgkj

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Portfolio Return Calculation
« on: July 18, 2019, 07:02:39 AM »
I have been reading about Modern Portfolio Theory online but don't follow it that well. Say you have two assets. One with an expected return of 5% and a standard deviation of 10% and another with a expected return of 15% and a standard deviation of 7%. Covariance is 0. How do you then estimate return if you know your weights? I know that probably sounds like a homework problem but what I am actually trying to to do is figure out how adding something very uncorrelated like angel investing could potentially impact a portfolio.

I think the answer might be this equation: https://d1rwhvwstyk9gu.cloudfront.net/2018/01/variance-of-a-two-stock-portfolio-.jpg  found here: https://blog.quantinsti.com/portfolio-analysis-calculating-risk-returns/
« Last Edit: July 18, 2019, 07:18:28 AM by hgjjgkj »

Louisville

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Re: Portfolio Return Calculation
« Reply #1 on: July 18, 2019, 07:24:51 AM »
Is there enough data on "angel investing" to come up with historical returns and standard deviation?

vand

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Re: Portfolio Return Calculation
« Reply #2 on: July 18, 2019, 11:39:00 AM »
In practice you will not find two different financial assets that are statistically completely uncorrelated, but you can use a site like Portfoliocharts to see how a portfolio mix has performed in the past and what its risk characteristics are like.

My admittedly fairly layman understanding of MPT is that its purpose is to show how you can trade expected return for lower risk in as efficient a manner as possible using varying asset allocations.

I found this series of videos on Risk Adjusted Return a good primer on what are desirable portfolio characteristics you might want to aim for:

https://www.youtube.com/watch?v=50oyD_e8Vh0

When Jack Schwager was interviewed about his last book in the "Market Wizards" series I remember he said words to the effect of having hindsight, he would have pushed the managers with the best risk adjusted returns as being the most outstanding, rather than just those with the best pure performance.
« Last Edit: July 18, 2019, 11:43:57 AM by vand »

SeattleCPA

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Re: Portfolio Return Calculation
« Reply #3 on: July 18, 2019, 12:02:21 PM »
I have been reading about Modern Portfolio Theory online but don't follow it that well. Say you have two assets. One with an expected return of 5% and a standard deviation of 10% and another with a expected return of 15% and a standard deviation of 7%. Covariance is 0. How do you then estimate return if you know your weights? I know that probably sounds like a homework problem but what I am actually trying to to do is figure out how adding something very uncorrelated like angel investing could potentially impact a portfolio.

I think the answer might be this equation: https://d1rwhvwstyk9gu.cloudfront.net/2018/01/variance-of-a-two-stock-portfolio-.jpg  found here: https://blog.quantinsti.com/portfolio-analysis-calculating-risk-returns/

This blog post which discusses flaws in the 100% stock allocation (as it's sometimes understood) may provide clarity. It explains how to step through some simple fiddling with portfolio visualizer to see how less than perfectly correlated assets combine to give you better results:

https://evergreensmallbusiness.com/100-stocks-allocation-suffers-two-big-flaws/

BTW, if you go to the blog, you might also look for the "Lessons from the Rate of Return of Everything" study blog post which explains how combining real estate and stocks in a portfolio can dampen risks and which points to some Excel worksheets that let you do the math.