Unformatted text preview: average of individual risk [since the third term in the sum is now smaller than in (*) ]. In this case there are benefits from diversification, as the investor receives the weighted average of returns, but takes on less than the weighted average of the risks. n portfolio return = R p = ∑ w i r i • the portfolio return is the weighted i=1 average of the individual returns n Key result: σ p < ∑ w i σ i • but, the portfolio risk is less than the i=1 weighted average of the individual asset class risk...
View Full Document
- Summer '08
- Weighted mean, Modern portfolio theory