Combining Assets: Portfolio Effects Flashcards
what is the formula for risk adjusted return
r/sigma
Simple way to calculate weighted return of a portfolio
expected return of the individual assets
if the value of two assets increase together, what is their covariance
positive
if the value of two assets move in different directions, what is their covariance
negative
what is the covariance
product of the average deviations of the assets
what is the range of correlation
-1 to +1
example of two industries that can expect to have a negative correlation
ice cream shop
umbrella shop
three types of correlation
perfect positive (Always move together)
perfect negative
zero
what does a correlation of 0 mean
the two assets have no connection
what is the efficient frontier
the optimal combination of risk and return
in excel, what is a covariance matrix
how assets covary with each other
along the diagonal is how they correlate with itself (variance)
for a portfolio is negative or positive correlation between different assets better
negative
is the variance of the portfolio less than or more than the weighted average of the variances of the assets in the portfolio
less than
what is a way to offer returns that will not be correlated with equity markets
hedge funds
what makes diversification effective
risk of a diversified portfolio is less than the weighted average risk of assets
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