Portfolio Theory

Question 1

standard deviation formula

Answer 1

sigma of r = square root of variance (r)

sigma = standard deviation
r = actual return of stock
variance = sigma^2

Question 2

variance formula

Answer 2

x1^2sigma1^2 + x2^2sigma2^2 + 2(x1x2rho1,2sigma1sigma2)

Question 3

specific risk def

Answer 3

idiosyncratic risk -> only affecting one company/industry
=> diversifiable

Question 4

systematic risk def

Answer 4

market risk (e.g. inflation) -> shared by most businesses
=> undiversifiable

Question 5

sharpe ratio

Answer 5

risk premium / standard deviation

(r-r) / sigma