Principles of Managerial Finance, 15th Edition

8.3 Risk of a Portfolio

1. LG3

2. LG4

In real-world situations, the risk of any single investment would not be viewed independently of other assets. New investments must be considered in light of their impact on the risk and return of an investor’s portfolio of assets. The financial manager’s goal is to create an efficient portfolio, one that provides the maximum return for a given level of risk. We therefore need a way to measure the return and the standard deviation of a portfolio of assets. As part of that analysis, we will look at the statistical concept of correlation, which underlies the process of diversification used to develop an efficient portfolio.

Portfolio Return and Standard Deviation

The return on a portfolio is a weighted average ...