Modern Portfolio Theory
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14 Terms
Risk
Profitability of an investment
Return
Uncertainty of an investment
E[R]
Expected Return
Expected Return
The average value of an investment's returns across all possible outcomes in proportion to the probability of each outcome
𝜎
Standard Deviation
Standard Deviation
The average deviation of all possible returns from the expected return
Weight of a Portfolio
The percent of your money spent on a specific investment in relation to the total amount invested
Return of a Portfolio
The percentage gain or loss on your total investment
Measures the profitability of all your investments
Risk of a Portfolio
The uncertainty in the amount you expect to receive from all investments (expected return) and the amount you actually receive from all your investments (rate of return)
(𝐸[𝑅𝑃])
Expected Return of a Portfolio
Expected Return of a Portfolio
the average value across all your investments and across all their possible outcomes in proportion to the probability of each outcome
(𝜎𝑃)
Standard Deviation of a Portfolio
Standard Deviation of a Portfolio
The average deviation of all possible returns from the expected return of the portfolio
