![]() Variance measures the risk or dispersion. When all the values are equal, then the sum of squared terms equal zero, and the variance is zero. ![]() The variance of a random variable is the expected value of squared deviation from the random variable's expected value.Ī variance is a number greater than or equal to zero because it is the sum of squared terms. The expected value of a random variable is the probability-weighted average of the possible outcomes of the random variable.Į(X) = Expected value of random variable X = ∑P(X i)X iĬalculation of portfolio expected return: The expected return of a portfolio with n securities is a weighted average of the expected returns on the component securities.Į(R P) = w 1E(R 1) + w 2E(R 2) +. We have already discussed the expected value and its calculation. CFA level I / Quantitative Methods: Basic Concepts / Probability Concepts / Expected value, standard deviation, covariance, and correlation of returns on a portfolio
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