![]() It also signifies the risk.Įxample 5: Calculating variance and standard deviation The unit of standard deviation is the same as that of the variance, and it is easier to interpret. The standard deviation is the positive square root of the variance. Variance measures the risk or dispersion. When all the values are equal, then the sum of squared terms equal zero, and the variance is zero. The variance of a random variable is the expected value of squared deviation from the random variable's expected value.Ī variance is a number greater than or equal to zero because it is the sum of squared terms. The expected value of a random variable is the probability-weighted average of the possible outcomes of the random variable.Į(X) = Expected value of random variable X = ∑P(X i)X iĬalculation of portfolio expected return: The expected return of a portfolio with n securities is a weighted average of the expected returns on the component securities.Į(R P) = w 1E(R 1) + w 2E(R 2) +. ![]() We have already discussed the expected value and its calculation. CFA level I / Quantitative Methods: Basic Concepts / Probability Concepts / Expected value, standard deviation, covariance, and correlation of returns on a portfolio
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