Page 79 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes
Year Rate of Return (%) (R – R) (R – R )
2
(R)
2001 12 -3 (12-15) 9
2002 18 3 (18-15) 9
2003 -6 -21(-6-15) 441
2004 20 5(20-15) 25
2005 22 7(22-15) 49
2006 24 9(24-15) 81
2 614
(R – R )

614
2
Putting the values of (R R) and N in equation (1), we get Variance ( 2 ) = = 102.33
6
Standard Deviation = = Variance = 2 ......(2)

Putting the value of 2 in equation (2),

we get = 102.33 = 10.1158 (approx.)
Hence standard deviation = 10.12%

2.5 Return and Risk of Portfolio

Return of Portfolio (Two Assets)

The expected return from a portfolio of two or more securities is equal to the weighted average
of the expected returns from the individual securities.
(R ) A A B B
P = W (R ) + W (R )
Where,
(R ) = Expected return from a portfolio of two securities
P
W = Proportion of funds invested in Security A
A
W = Proportion of funds invested in Security B
B
R = Expected return of Security A
A
R = Expected return of Security B
B
W + W = 1
A B

Example: A Ltd.'s share gives a return of 20% and B Ltd.'s share gives 32% return. Mr.
Gotha invested 25% in A Ltd.'s shares and 75% of B Ltd.'s shares. What would be the expected
return of the portfolio?
Solution:

Portfolio Return = 0.25(20) + 0.75 (32) = 29%

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