Financial Tutorial  
Discuss about Asset Allocation in our Free Forum

Asset Allocation & Portfolio Management: Measuring Asset Risk & Portfolio Risk
All information are subject to terms of use

The asset allocation and portfolio management techniques we will describe mainly use statistical indicators you should be familiar with. If you are not, first visit our statistics tutorial.

The standard statistical measure of spread are variance and standard deviation.

We will use variance and standard deviation to measure risk but we will amend the standard formula to fit with the concept of expected return as seen in previous section.

The variance formula becomes:

Where

E[r] is the expected return
P(s) the probability that the rate r_s occurs.
r_s the return at s level.

The standard deviation is the square root of the variance.

The variance and the expected return can be estimated on single asset as a stock or a bond but also to a portfolio.

Now that the concepts of expected return and risk measurement have been introduced, we can analyze why diversification reduces risk.

More on the subject? Visit our BookStore.

Some practical allocation examples: Click here