# Portfolio Weight, Return & Variance: Definition & Examples

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• 0:02 What Is a Portfolio?
• 0:42 Portfolio Weight
• 2:36 Portfolio Return
• 4:16 Portfolio Variance
• 5:54 Lesson Summary

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Lesson Transcript
Instructor: Keocha Evans

Keocha has taught college Accounting and Business courses, she has master's degree in Business accompanied by a Bachelors degree in Accounting.

A portfolio can be designed in several different ways. It is important to understand the basics of a portfolio before building and managing one. In this lesson, we will go over the weight, return, and variance of a portfolio.

## What Is a Portfolio?

A portfolio is a collection of financial assets or investments, such as stocks, bonds, and cash. Portfolios can be held by an investor, hedge fund, or a type of financial institution. Risk tolerance is simply the amount of risk you are able to handle as an investor.

The associated risk tolerance with a portfolio usually determines its design. When designing a portfolio, investors will always want to maximize return and minimize risk. However, as you may have heard, the higher the risk tolerance, the higher the return. Investors should always go with a risk tolerance that they are comfortable with, both mentally and financially.

## Portfolio Weight

The weight of a portfolio is simply the percent of an investment portfolio that is held by a single asset. Sounds simple enough, right? Let's think of the weight of a portfolio in terms of pizza slices. If you have 8 slices of pizza and the total value of the pizza is \$20, then each slice of pizza will hold a weight of 40%. We come to that number with a bit of math: (8/20 = 0.40 or 40%).

That calculation is an example of a portfolio weight by value. There are several ways the weight of a portfolio can be determined. The value calculation is the most basic and most used method. Other methods include cost, unit, sectors, and types of securities.

For example, suppose you own the following portfolio investments: \$3,000 of Stock A, \$5,000 of Stock B, \$2,500 of Stock C, and \$6,000 of Stock D. Your total portfolio value is \$16,500, and we can use the value method formula to determine the value weight of Stock C.

Formula for value method calculation = Stock Value / Total portfolio value x 100

Stock C: 2,500 / 16,500 = 0.15 x 100 = 15%. Stock C has a weight value of 15% of your total portfolio.

Calculating the weight of a portfolio can be a very useful investment tool. The weight of a portfolio can tell investors how much of their portfolio performance is dependent on a particular asset. If you have an asset that makes up 30% of your portfolio weight, then it will be more vital to the success of your portfolio than an asset that makes up only 2%. Now that we know how to calculate the weight of our portfolio, let's see how much we can make off of it.

## Portfolio Return

After building your portfolio and understanding the weight of each asset, you will probably want to know how well it will do. The expected return of a portfolio is the amount an investor anticipates he or she will receive on an investment. Expected return is a tool used to determine whether an investment portfolio will have a negative or positive average net income. Now, this is just an expectation; it's not a guaranteed rate of return. Examining the potential performance of your portfolio will assist you in meeting your target goals and making any adjustments.

To calculate the expected return of a portfolio, you will need to know the rate of return. The rate of return is the percentage of profit from an investment over a certain time period. Expected return is calculated by taking the average of the weight of all possible returns and multiplying it by the rate of return. Sounds complicated, I know. Let's break it down!

For example, say Stock C has a 50% chance of producing a 20% profit and a 50% chance of producing a 10% loss.

Use the formula: Rp = w1 R1 + w2 R2

Rp = expected return for the portfolio

w1 = weight of Stock C

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