Investment Math II

Question 1

How do you calculate expected return of a portfolio?

Answer 1

Expected Return = E(Rp) = ∑Wi [E(Ri)]

Question 2

How do you calculate covariance / comovement?

Answer 2

COVij = 1/N ∑ (Ri – E(Ri)) (Rj – E(Rj))

Question 3

What is our absolute measure of co-movement?

Answer 3

covariance

Question 4

How do you calculate correlation?

Answer 4

ρij = COVij / σi * σj

Question 5

What is our relative measure of co-movement?

Answer 5

Correlation

Question 6

Under Capital Market Theory only this term is relevant, __________.

Answer 6

Systematic risk, because the rest of the risk is diversified away

Question 7

How do you calculate returns under capital market theory?

Answer 7

CAPM = E(Ri) = Rf + βi (RM – Rf)
Where Rf = Risk free RAte
Bi = Beta
RM = Portfolio Return

Question 8

A security with a beta of 1 will give you a return ___________ to the market.

Answer 8

Equal to the market

Question 9

A security with a beta of 0 will give you a return _________ to the market.

Answer 9

Risk free

Question 10

A security with a beta greater than 1 will give you a return _______ the market.

Answer 10

greater than