Tag: portfolio
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Portfolio risk calculator and formula
We often say that risk and return are two sides of the same coin. So, when assessing the performance of a portfolio, we need to consider its risk as well as its return. In the previous lesson, we focused on portfolio return. Now, we turn our attention to portfolio risk. Portfolio risk calculator You can…
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How to calculate portfolio risk and return in Excel
In this tutorial, we’ll teach you how to calculate portfolio risk and return in Excel. We’ll focus on an example where we construct a portfolio of the following three stocks: Tesla (TSLA), Amazon (AMZN), and Netflix (NFLX). If you’re unfamiliar with the formulas for portfolio return and portfolio risk, we’d recommend you check the following…
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Capital allocation line
When a risk-free asset exists in an economy, investors can add that asset to their portfolios if they wish so. In the risk-return space, the combination of the risk-free asset and any risky asset is a straight line. This line is called the capital allocation line as it shows how an investor’s capital is allocated…
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Security market line
The security market line (SML) depicts the linear relationship between expected return and systematic risk, which is measured by beta, according to the capital asset pricing model (CAPM). Specifically, the equation of the security market line is nothing but the CAPM formula: where E[Ri] is the expected return on asset i, E[Rm] is the expected…
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Market portfolio
We have so far learned how to calculate the risk and return of portfolios and how to trace an efficient frontier through mean-variance optimization. It is now time to introduce a special portfolio that will play a significant role when we discuss the CAPM: The market portfolio. What is the market portfolio? The market portfolio is the…
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Minimum variance portfolio
In this lesson, we explain what is meant by the minimum variance portfolio (MVP), derive its formula for the two-asset case, and provide an online calculator as well. You can also check out our video tutorial to learn how to find the position of the MVP on the efficient frontier using Excel’s solver tool. And,…
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Treynor ratio formula, calculator
Treynor ratio is a popular risk-adjusted performance measure. It gets its name from the American economist Jack Treynor who came up with this measure in the mid-1960s (see the full reference at the end). It is a measure of how much “excess return” (i.e., return above the risk-free rate) a security (stock, bond, mutual fund, etc.)…
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Sharpe ratio calculator, formula
Sharpe ratio is among the most widely used performance evaluation metrics in the fund management industry. It is a reward-to-risk ratio, such that it captures the (excess) return an asset (e.g., stock) generates per unit of (total) risk, which is measured by return volatility. It was developed by Nobel laureate William F. Sharpe, who is…
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Efficient frontier calculator
In modern portfolio theory, the efficient frontier represents the collection of all efficient portfolios within a market. Efficient portfolios offer the best risk-return tradeoff and, as such, are superior to inefficient portfolios, which are suboptimal. In this lesson, we explain how investors can trace the efficient frontier using mean-variance optimization (the topic of the previous…
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Mean-variance optimization
According to modern portfolio theory, investors are concerned about the “mean” and “variance” of asset returns, where the former captures the “centrality” and the latter the “spread” (or “riskiness”) of potential returns. As such, investors engage in mean-variance optimization. That is, they seek the portfolios that offer the best tradeoff between risk and return. In…
