On Estimating the Risk of an Investment Portfolio

Abstract

According to Markowitz's classic approach, the risk of an investment portfolio is determined by the standard deviation of its return. Two other risk assessment methods are considered in this paper. One calculates the so-called VaR (Value at Risk), while the other calculates the standard deviation for a portfolio return not exceeding the mean return. A computational formula is derived for the latter. In the typical case of continuous return distribution, some simpler and more convenient definition for VaR is given. These three risk assessment methods are compared between each other.