Lecture 15 - Risk and return CAPM II

Question 1

What factors might influence the level of risk for an individual security?

Answer 1

-Leverage or gearing
- Industrial sector
- Company size
- Age
- State of the economy
- Geographic location

Question 2

4 step process to calculate variance

Answer 2

1. Calculate expected return
2. Calculate the deviation from the expected return for each state of the economy
3. Square the deviations
4. Variance is the weighted average of the squared deviations

Question 3

Covariance vs Correlation

Answer 3

Covariance - A measure of how the returns on two assets co vary, move together

Correlation - A standardised measure of how the returns on two assets co vary, or move together