Portfolio Theory

Question 1

Return

Answer 1

Ending Value - Beginning Value / Beginning Value

Beginning Value usually = P0

Ending Value usually = P1+D1

Question 2

Risk

Answer 2

Uncertainty about the future, high risk usually also implies higher reward

Question 3

Variance

Answer 3

Variability of portfolio outcomes

CANNOT be normally distributed because they are not negative

[0,infinity]

Question 4

Standard Dev

Answer 4

SQRT(variance)

Question 5

Durations and portfolio

Answer 5

Longer duration bonds have more sensitivity to changes in interest rates and thus a higher return

Question 6

Arithmetic Return vs Geometric Return

Answer 6

Arithmetic better for an individual year / differing YOY returns and geometric better for multiple years

Question 7

Portfolio weights < 0

Answer 7

It is possible if: short stocks OR borrowing money

Question 8

Correlation coefficent

Answer 8

measure the extent to which 2 assets move in the: same, independent, or opposite directions

[-1,1]

Question 9

Covariance

Answer 9

measure the extent to which 2 assets move in the: same, independent, or opposite directions

unbounded (infinity)

Question 10

Portfolio weights > 0

Answer 10

expected return is between the lowest and highest individual returns inclusive

standard deviation CAN be below