# Variance of market portfolio return

Posted: Yuriy S. Date: 08.07.2017

Most investors do not hold stocks in isolation.

Instead, they choose to hold a portfolio of several stocks. When this is the case, a portion of an individual stock's risk can be eliminated, i. This principle is presented on the Diversification page. First, the computation of the expected return, variance, and standard deviation of a portfolio must be illustrated.

Once again, we will be using the probability distribution for the returns on stocks A and B. From the Expected Return and Measures of Risk pages we know that the expected return on Stock A is The Expected Return on a Portfolio is computed as the weighted average of the expected returns on the stocks variance of market portfolio return comprise the portfolio.

### Measures of Risk - Variance and Standard Deviation

The weights reflect the proportion of the portfolio invested in the stocks. This can be expressed as follows:.

### Portfolio Variance

Two measures of how the returns on a pair of stocks vary together are the covariance and the correlation coefficient. The Covariance between the returns on two stocks can be calculated using the following equation:.

The Correlation Coefficient between the returns on two stocks can be calculated using the following equation:. Using either the correlation coefficient or the covariance, the Variance on a Two-Asset Portfolio can be calculated as follows:.

#### Portfolio Returns and Risks; Covariance and the Coefficient of Correlation

This is the essence of Diversificationby forming portfolios some of the risk inherent in the individual stocks can be eliminated. Two Asset Portfolio Calculator.

#### Expected Return and Variance for a Two Asset Portfolio - Finance Train

Two Asset Portfolio Exercise. Portfolio Risk and Return Most investors do not hold stocks in isolation. State Probability Return on Stock A Return on Stock B 1. Covariance and Correlation Coefficent between the Returns on Stocks A and B. Variance and Standard Deviation on a Portfolio of Stocks A and B. 