Chapter 8 Flashcards
What is the basic relationship between risk and return?
The higher the risk, the lower the return
Coefficient of variation
CV = standard deviation/expected return
this calculates, for every dollar return, how much risk is there
Portfolio:
Differentiate between:
1) systematic risk
2) non-systematic risk
1) systematic risk - (non-diversifiable, market)
2) non-systematic risk - (diversifiable, company-specific)
Portfolio:
What cause diversifiable risks?
internal cause (company specific)
ex.
unsuccessful marketing
poor management
Portfolio:
What does NOT cause diversifiable risks?
external casue
ex.
poor economic conditions
Portfolio:
What is the relationship of beta risk to market risk?
“How risky the stocks are” compared to the market risk
Portfolio:
Coefficient of correlation with a value of -1 means
perfectly negatively correlated stocks
good for diversification
Portfolio:
Coefficient of correlation with a value of 1 means
perfectly positively correlated stocks
not good for diversification
Portfolio:
Coefficient of correlation with a value of 0 means
No correlation at all
Portfolio:
How overall portfolio risk is measured?
The overall portfolio risk is measured by the weighted average beta of all the stocks in it.
what is the ‘relevant risk’ for a stock being added to a portfolio?
The relevant risk is the market risk/beta risk
