Q. What is Expected Return on a Portfolio?
The Expected Return on a Portfolio is simply' the weighted average of the expected returns of the individual securities in the given portfolio. Where Rp = Expected Rate of Return in a Portfolio Wi = Proportion of total investment invested in that asset Rj = Expected Rate of return as the Security
n = number of securities in a given portfolio
Suppose your Expected Rate of Return from Agarawal Mills (AML) stock is 20 percent during a given holding period and the same rate of return in case of Gupta Mills (GM) scrip is, say 16 percent and you are interested in putting your total investment equally in both these securities, then the Expected
Rate of Return from the Two-Asset Portfolio is suppose you are interested in including the Tinkuji Mills scrip also into your Portfolio, by partly selling of your earlier investment in Gupta Mills, say about 20 percent of total investment and if your Expected Rate of return from Tinkuji Mills in 22 percent during the same said holding period, then the Return from the Asset Portfolio would be Portfolio Risk.
We have seen that the Portfolio Rates of Return are just the weighted average rates of Return of individual assets in the given portfolio. But the calculation of portfolio risk is not similar to weighted average of individual assets' total risk. Portfolio's risk is sometimes substantially different from individual assets risk. It is quite possible that the individual assets may be substantially risky with sizeable Standard Deviations and when combined may result in a Portfolio which is absolutely riskless.