Investment risk

Question 1

Bell curve shows what re: the mean

Answer 1

equal number of returns fall above and below the mean

Question 2

single most important factor when considering portfolio diversification

Answer 2

Correlation coefficient

Question 3

lognormal distribution

Answer 3

if returns of stock X are normally distributed, then those returns raised to any power are normally distributed

Question 4

Positive skewness more data is found where relative to the mean

Answer 4

to the left

Question 5

Negative skewness more data is found where relative to the mean

Answer 5

to the right

Question 6

Skewness measures what

Answer 6

the asymmetry of the distribution

Question 7

Correlation coefficient is also just called what

Answer 7

correlation

Question 8

Correlation measures what

Answer 8

degree and direction of movement between 2 securities, or how 2 securities vary relative to each other

Question 9

If stock A & B make up 50% of portfolio, are perfectly negatively correlated, with positive avg returns for each, how will the portfolio return?

Answer 9

It will have a fixed return with no measurable risk. Standard deviation is zero

Question 10

If 2 stocks have a correlation coefficient of +1, does combining them into a portfolio reduce risk?

Answer 10

No

Question 11

Say 2 stocks have a low correlation, -.35, does combining them together reduce risk?

Answer 11

Yes

Question 12

Coeeficient of determination

Answer 12

“R squared” - the square of the correlation coefficient, always a positive number. The proportion of movement in one investment that is explained by the movement in another