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Risk-Return Analysis: Portfolio Risk and Return Calculation Methods
Portfolio risk and return calculation methods
Risk-Return Analysis Overview
Risk-return analysis is a fundamental concept in portfolio management that examines the trade-off between the potential returns of an investment and the associated risks. This analysis helps investors make informed decisions by evaluating how much risk they are willing to take to achieve their desired returns.
Effective risk-return analysis involves understanding various risk metrics such as volatility, beta, Value at Risk (VaR), and Sharpe ratio. By quantifying these relationships, traders and investors can optimize their portfolios to maximize expected returns while minimizing risks.
Modern portfolio theory, developed by Harry Markowitz, provides the foundation for risk-return analysis by demonstrating how diversification can reduce portfolio risk without necessarily reducing expected returns. This framework helps create efficient portfolios that offer the best possible return for a given level of risk.