Portfolio Theory - Part 4 (Math Concepts)

ZACH DE GREGORIO, CPA www.WolvesAndFinance.com

This video discusses the Math Concepts related to Portfolio Theory. The equations specifically relate to a two asset portfolio. The key concept is Portfolio theory separates risk from return. Risk and Return are usually related values, but as you combine investments in a portfolio, risk and return will separate. The reason is that the movements of negative correlations will cancel each other out reducing the risk of the overall portfolio. The key to these equations is the very last variable known as the correlation coefficient. This is going to range from 1 to -1. If the correlation coefficient is closer to 1, the risk is going to be similar to the weighted average of the portfolio. As the correlation coefficient approaches -1, you can reduce the risk almost completely. This is because as one asset loses value, the other asset gains value. By constructing a smart portfolio, you are generating value without paying for it.

Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice. ... https://www.youtube.com/watch?v=HLi-yOkZiDQ