Portfolio

Question 1

Return on a share formula

Answer 1

{Dividends received + (share price at end of period - purchase price)} / Purchase price

Question 2

what does the degree of risk reduction depend on

Answer 2

• the correlation
• the number of securities over which to spread the risk

Question 3

portfolio returns

Answer 3

weighted average of the expected returns on the individual investments

Question 4

portfolio risk

Answer 4

less than the weighted average risk of the individual investments, except for perfectly positively correlated investments where it is a weighted average

Question 5

relationships between covariance and correlation

Answer 5

• If Cov is -ve , Cora is -ve
• If Cov is 0, Corr is 0
• If Cov is +ve, corr is +ve

Question 6

Indifference curves

Answer 6

represents cure for someone who is risk averse.
- upwards slopping and gets steeper
- implies required more return as risk increases
- different curves for different investors

Question 7

no of shares which diversifies away most of the risk

Answer 7

15-20
- risk reduction slows down after that

Question 8

issues with portfolio theory

Answer 8

• implemented using historic returns, standard deviations and correlations to aid decision making about future investments
• the volume of computations for large portfolios can be inhibited (however we have computers)
• the accurate estimation of indifference curves is probably an elusive goal