Portfolio theory formulae
Average expected return
Ra+b = Para + Pbrb
Proportion of a x return of a + proportion of b x return of b
Variance
(Actual return - average return) 2 (squared)
Standard deviation
Square root of variance
Risk of portfolio
Pa2Riska2 + Pb2riskb2 + 2PaPbRiskaRiskbCorab
Proportion of a squared x risk of a squared + proportion of b squared + risk of b squared + 2 x Propotion of a x Proportion of b x risk of a x risk of b x correlation coefficient
Return
Rf + B (rm- rf)
Returns from risk free investment + Beta x (Returns expected from market portfolio - returns from risk free investment)
Risk faced
Os = Bom
Systematic risk in the portfolio = Beta x systematic risk in the market portfolio
Beta
os / om
Systematic risk in the portfolio / systematic risk in the market portfolio
Formula for plotting the security market line
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CAPM
R = rf+B(rm-rf)