The actual and weighted portfolio risk are measures used to assess the risk associated with a portfolio of assets. While the actual portfolio risk reflects the volatility or variability of the portfolio’s returns, the weighted portfolio risk takes into account the weights assigned to each asset in the portfolio.
- Actual Portfolio Risk: The actual portfolio risk is a measure of the variability or volatility of the portfolio’s returns. It quantifies the potential deviation of the actual returns from the expected returns. The most commonly used measure of actual portfolio risk is the standard deviation or variance of the portfolio’s returns. A higher standard deviation or variance indicates a higher level of risk.
To calculate the actual portfolio risk, you need to consider the historical returns of the portfolio. By using statistical techniques, such as calculating the standard deviation or variance, you can determine the degree of dispersion or spread of the portfolio’s returns around the mean or expected return.
- Weighted Portfolio Risk: The weighted portfolio risk considers not only the risk of each individual asset in the portfolio but also the correlation or covariance between the assets. It reflects the overall risk of the portfolio, taking into account the diversification benefits achieved by combining different assets.
To calculate the weighted portfolio risk, you need to consider the weights of each asset, the standard deviation or variance of each asset’s returns, and the correlation or covariance between the assets. By incorporating the weights and the interrelationships between the assets, you can obtain a more accurate measure of the portfolio’s risk.