Answer:
The expected return of a portfolio is computed as PROBABILITY DISTRIBUTION OF THE PORTFOLIO'S POSSIBLE RETURNS and the standard deviation of a portfolio is BASED ON THE STANDARD DEVIATION OF EACH WEIGHTED ASSET'S RETURN.
Explanation:
The expected return of a portfolio is basically the sum of the expected returns of each individual asset, e.g. a portfolio is made up of two assets with equal weights.
Asset A's expected returns = 15%, with a probability of 0.4, 10%, with a probability of 0.2, and 1% with a probability of 0.4. This assets expected return = (15% x 0.4) + (10% x 0.2) + (1% x 0.4) = 8.4%
Asset B's expected return = 10%, with a probability of 0.3, 8%, with a probability of 0.4, and 6% with a probability of 0.3. This assets expected return = (10% x 0.3) + (8% x 0.4) + (6% x 0.3) = 8%
Portfolio's expected return = (8.4% x 1/2) + (8% x 1/2) = 8.2%
standard deviation = √variance
variance = [(weight stock A)² · (σ of stock A)²] + [(weight stock B)² · (σ of stock B)²] + (2 · weight of stock A · weight of stock B · covariance between stocks A and B)
