Chapter 12, Problem 1CC

Summary Introduction

Portfolio:

A portfolio is defined as the group of investments held by an investor, which includes bonds, stocks, futures, options, and other investments like gold. Most of the portfolios are diversified in order to guard against the risk of holding a single security. So, portfolio analysis involves analyzing the portfolio as a whole.

The return of a portfolio is the weighted average of the return of its component assets. Portfolio risks can be calculated by considering the standard deviation of the variance of actual returns of the portfolio over time.

To ascertain: What the weights in a portfolio tells.

Answer to Problem 1CC

Solution: The weights in a portfolio tell what fractions of different individual investments are held in a portfolio.

Explanation of Solution

The weights in a portfolio tell what fractions of different individual investments are held in a portfolio. It tells the fraction covered by each single investment in the total portfolio. These portfolio weights of every single investment in a particular portfolio make up 100 percent. The weight of every single investment in a portfolio can be calculated as the value of the individual investment upon total portfolio value. The formula used to determine weight of portfolio is expressed as follows.

   $w_i=\frac{\text{Value}\text{of}\text{Investment}i}{\text{Total}\text{Value}\text{of}\text{Portfolio}}$

Where,

• $w_i$ is the portfolio weight.

Conclusion

Hence, the weights in a portfolio tells the weight of each individual investment in a portfolio.