EXAMPLE 4.40 Portfolio Analysis

CASE 4.3 Now we can complete our initial analysis of the portfolio constructed on a 70/30 mix of S&P 500 index shares and utility sector shares. Based on monthly returns between 2000 and 2014, we have

In Example 4.34 (pages 227–228), we found that the mean return is 0.411%. To find the variance of the portfolio return, combine Rules 1 and 3:

234

We see that portfolio has a smaller mean return than investing all in the utility index. However, what is gained is that the portfolio has less variability (or volatility) than investing all in one or the other index.