Financial Management: Principles and Applications, 13/e

8.1 Portfolio Returns and Portfolio Risk

The most important thing that we learn in this chapter is that with appropriate diversification, you can lower your portfolio’s risk without lowering its expected rate of return. How does this concept of diversification relate to Principle 2: There Is a Risk-Return Tradeoff? What we learn in this chapter is that some risk can be eliminated by diversification and that those risks that can be eliminated are not necessarily rewarded in the financial marketplace. To understand this, we must delve into the computation of portfolio expected return and portfolio risk.

Calculating the Expected Return of a Portfolio ...