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Quantitative MethodsModule 5 of 11

Portfolio Mathematics

5

Concepts

4

Formulas

1

Decisions

4

Quiz Questions

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Key Concepts

5 concepts covered in this module.

Portfolio Expected Return

E(Rp) = Σ wi E(Ri). Weighted average of individual expected returns.

Portfolio Variance (2 assets)

σ²p = w²1σ²1 + w²2σ²2 + 2w1w2Cov(1,2). Key: correlation drives diversification benefit.

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Formulas

4 essential formulas for this module.

Portfolio Variance (2 assets)

σ²p = w²Aσ²A + w²Bσ²B + 2wAwBρABσAσB

Where: w = weights, ρ = correlation, σ = standard deviation

Covariance from Correlation

Cov(A,B) = ρAB × σA × σB

Where: ρ = correlation coefficient

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Decision Frameworks

1 decision frameworks to guide your analysis.

Effect of correlation on portfolio risk?

  • ρ = +1: no diversification, portfolio SD = weighted average
  • ρ = 0: significant diversification
  • ρ = -1: maximum diversification, can create zero-variance portfolio

Mind Map

Visual overview of how concepts connect in this module.

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Flashcard

Portfolio Expected Return

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Answer
E(Rp) = Σ wi E(Ri). Weighted average of individual expected returns.
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