Financial Subject: Matrix notations and portfolio computations

Matrix notation simplifies the writing of the portfolio problem; if the proportion of asset I in
the portfolio is denoted by , it is convenient to write the portfolio proportions as a column
vector:

1
.
=
.

N

We write the transposed vector of as:

T = [ 1 . . N ]

The expected return of the portfolio whose proportions are given by is the weighted average
of the expected returns of the individual assets.
N
E ( rp ) = i E ( ri )

We write E(r) and E(r) T the column and row (respectively) vector of asset returns.

We write the expected portfolio return in matrix notation as:

N
E ( rp ) = i E ( ri ) = T E ( r ) = E ( r ) T

The variance of the portfolio is given by:

N N N N N N
Var ( rp ) = i Var ( ri ) + 2 i j Cov( ri , r j ) = i ii + 2 i j ij
i =1 j =i +1 i =1 j =i +1

If we denoteS the variance covariance matrix, the matrix that has ij, then the portfolio
variance is given by:

Var ( rp ) = T S

If now we denote 1 = [ 1 . . N ]the proportions of portfolio 1 and 2 = [ 1 . . N ]

the proportions of portfolio 2 we can see that the covariance of the two portfolios is given by:
 Co var( rp ) = 1 S 2T

The matrix notation appears to be clearly and easily generalized in all calculations of
variances, whatever the variance is: two assets, n assets