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Risk and return are correlated in the world of business or investment. Return is the reward that you get after you get on a risk. Risk is something whose outcome you are not really sure about. It has the potential of both positive and negative outcome.
The greater is the risk, the higher is the potential for profit, but along with it, there is also the potential of going into loss. Risks are always uncertain, so it’s hard to tell before whether the outcome will be positive or loss.
When calculating the risk and return of a portfolio of assets, let’s assume two assets in the portfolio are R 1 and R2. The weights of two assets in the portfolio would be W1 and W2. The total sum of the weight of the portfolio should be 1. The calculation of the returns from the portfolio would be: Rp=W1R1+ W2R2
The calculation of the portfolio standard deviation would be:
= 1 w2 1.2 1 2
= 1 w2 Cov1.2
The basic elements you would require to structure your risk and return assignment are:
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