Key Concepts

• Expected Return: The anticipated return of a portfolio is based on the weighted average of individual asset returns.

• Risk (Variance/Standard Deviation): Measures the portfolio’s return volatility. A higher variance indicates greater uncertainty and potential for large fluctuations.

• Correlation: The degree to which two assets move in relation to each other. Negative or low correlations between assets reduce overall portfolio risk.

• Efficient Frontier: A curve representing the set of optimal portfolios offering the highest expected return for a given level of risk. Portfolios below the frontier are suboptimal, while those on the curve maximize return for their risk level.

• Sharpe Ratio: A measure of risk-adjusted return, calculated as the portfolio's return above the risk-free rate divided by its standard deviation. Higher Sharpe ratios indicate better risk-return trade-offs.