COMM 371 –
Lecture 4 (25/09/23):
How do we choose a portfolio of Assets
Return on a Portfolio of Assets: Portfolio Return is a weighted average of the returns on the individual assets. Short Sale: Selling a stock that we don’t own. Borrow the stock from a broker and sell it immediately in the open market. After time t you buy the stock back and return the stock to the
broker. You also need to compensate the broker for any paid dividends. Expected Return and Variance of a Portfolio:
The variance of a portfolio return depends not only on the return variances of the individual assets, but also on the covariance of the individual asset returns.
Variance of a portfolio return is greater when the covariances are positive rather than negative and vice versa.
The equations for portfolio return variance can be written in terms of standard deviations and correlations, rather than variances and covariances.
