Lesson 5: Mean - Variance Portfolio Theory

Question 1

Volatility

Answer 1

• square root of variance
• σ = √ (Σ (Ri - R)^2/ (n-1))

Question 2

Sharpe ratio

Answer 2

= (α - r)/σ with α: annual return on a stock or portfolio, r: risk free interest rate, σ: volatility

Question 3

Covariance

Answer 3

= Σ (R1j * R2j - nR1*R2) / (n-1)

Question 4

Efficient frontier

Answer 4

The curve with the maximal return for each level of volatility

Question 5

Var(R) (R: return of n-stock portfolio)

Answer 5

Var(R) =ΣΣxixjCov(Ri,Rj) (xi: weight of stock i in the portfolio, xj: weight of stock j in the portfolio)