This module is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 1 of 13 · 13 min
Portfolio expected return and variance
A portfolio's expected return is a plain weighted average of its holdings, but its risk is not, because risk also depends on how the holdings move together.
In short
- Portfolio weights are each holding's share of the portfolio's market value; they sum to 1.
- Expected return of the portfolio = weighted average of the holdings' expected returns. Nothing else matters for it.
- Portfolio variance measures expected risk: the expected squared deviation of the portfolio return from its mean.
- Two-asset variance = : two own-risk terms plus a co-movement term.
- Standard deviation is the square root of variance and is quoted in the same units as returns.
- Portfolio standard deviation is at most the weighted average of the holdings' standard deviations; the gap is the benefit of diversification.
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