April 2011
Beginner
704 pages
21h 44m
English
book
The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition
by Frank J. Fabozzi, Harry M. Markowitz
Content preview from The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition
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MEASURING A PORTFOLIO’S EXPECTED RETURN
We are now ready to define the actual and expected return of a risky asset and a portfolio of risky assets.
Measuring Single-Period Portfolio Return
The actual return on a portfolio of assets over some specific time period is straightforward to calculate using the formula:
where
| Rp | = | rate of return on the portfolio over the period |
| Rg | = | rate of return on asset g over the period |
| wg | = | weight of asset g in the portfolio (i.e., market value of asset g as a proportion of the market value of the total portfolio) at the beginning of the period |
| G | = | number of assets in the portfolio |
Equation (3.2) states that the return on a portfolio (Rp) of G assets is equal to the sum over all individual assets’ weights in the portfolio times their respective return. The portfolio return Rp is sometimes called the holding period return or the ex post return.
For example, consider the following portfolio consisting of three assets:
| Asset | Market Value at the Beginning of Holding Period | Rate of Return over Holding Period |
|---|---|---|
| 1 | $6 million | 12% |
| 2 | $8 million | 10% |
| 3 | $11 million | 5% |
The portfolio’s total market value at the beginning of the holding period is $25 million. Therefore,
| w1 | = | $6 million/$25 ... |
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