Beta - sum of these four boxes security 1 security 2...

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Beta Calculating portfolio risk; suppose we invest x 1 in security 1 and x 2 in security 2. What is the return on the entire portfolio? That part is easy: it is just the weighted average of the individual returns. What is the risk of the entire portfolio. We set it out on a 2 x 2 grid: the risk--the variance-- is the
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Unformatted text preview: sum of these four boxes security 1 security 2 security 1 x 1 2 s 1 2 x 1 x 2 s 12 security 2 x 1 x 2 s 12 x 2 2 s 2 2 E(x(1)r(1)+x(2)r(2))^2 = E(x(1)r(1))^2 + E(x(1)r(1)x(2)r(2))+E(x(1)r(1)x(2)r(2))+E(x(2)r(2))^2 This formula easily generalizes...
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