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The best measure is the standard deviation of the difference between the portfolio and index returns. Many portfolios are managed to a benchmark, typically an index. Some portfolios, notably index funds , are expected to replicate, before trading and other costs, the returns of an index exactly, while others ' actively manage ' the portfolio by ...
R M = return on the market portfolio σ M = standard deviation of the market portfolio σ P = standard deviation of portfolio (R M – I RF)/σ M is the slope of CML. (R M – I RF) is a measure of the risk premium, or the reward for holding risky portfolio instead of risk-free portfolio. σ M is the risk of the market portfolio. Therefore, the ...
The MPT is a mean-variance theory, and it compares the expected (mean) return of a portfolio with the standard deviation of the same portfolio. The image shows expected return on the vertical axis, and the standard deviation on the horizontal axis (volatility). Volatility is described by standard deviation and it serves as a measure of risk. [7]
In modern portfolio theory, the efficient frontier (or portfolio frontier) is an investment portfolio which occupies the "efficient" parts of the risk–return spectrum. Formally, it is the set of portfolios which satisfy the condition that no other portfolio exists with a higher expected return but with the same standard deviation of return (i ...
The rate of return on a portfolio can be calculated indirectly as the weighted average rate of return on the various assets within the portfolio. [3] The weights are proportional to the value of the assets within the portfolio, to take into account what portion of the portfolio each individual return represents in calculating the contribution of that asset to the return on the portfolio.
Portfolio optimization is the process of selecting an optimal portfolio (asset distribution), out of a set of considered portfolios, according to some objective.The objective typically maximizes factors such as expected return, and minimizes costs like financial risk, resulting in a multi-objective optimization problem.
In financial mathematics, a deviation risk measure is a function to quantify financial risk (and not necessarily downside risk) in a different method than a general risk measure. Deviation risk measures generalize the concept of standard deviation .
A problem for this model is the lack of a general model of portfolio choice and asset valuation for prospect theory. A second class of explanations is based on relaxation of the optimization assumptions of the standard model. The standard model represents consumers as continuously-optimizing dynamically-consistent expected-utility maximizers.