Risk and Return

Question 1

what are the two types of risk

Answer 1

specific
market

Question 2

what does variance measure

Answer 2

how far each number is from the mean and thus from every other number in the set

Question 3

what does standard deviation measure

Answer 3

volatility

Question 4

how does diversification reduce risk

Answer 4

stocks that have low correlation (prices don’t move together) cancel each other out

Question 5

if the covariance is positive what does this mean

Answer 5

the two returns tend to move together

Question 6

if the covariance is negative what does this mean

Answer 6

the two returns tend to move in opposite direction

Question 7

what will the correlation between two stocks always be between

Answer 7

-1 and +1

Question 8

what is a correlation of -1 called

Answer 8

perfectly negatively correlated

Question 9

what is a correlation of +1 called

Answer 9

perfectly positively correlated

Question 10

what is modern portfolio therory

Answer 10

rational investors want to minimise risk and maximise return

investors seek efficient frontier

Question 11

what does it mean to buy on margin

Answer 11

borrowing money to invest in a stock

Question 12

what does sharpe ratio measure

Answer 12

reward to volatility ratio of a portfolio