Risk And Return

Question 1

Expected return of an asset

Answer 1

Sum of (probabilities x associated return)

Question 2

Variance of an asset

Answer 2

V = p1 x (r1 - ER)^2 + p2 x (r2-ER)^2

Question 3

Standard deviation

Answer 3

Square root of an asset

Total risk of an asset

Question 4

Covariance of two assets

Answer 4

Cov (A,B) = p1 x (rA1 - ERA) (rB1 -ERB) + p2 x (rA2 - ERA)(rB2 - ERB) + p3 x (rA3 -ERA)(rB3-ERB)

Question 5

Corrélation of two assets

Answer 5

Cov (A,B) / (stand dev (A) x stand dev (B))

Question 6

Expected return of a portfolio of two assets

Answer 6

ERp = w1 x ER1 + w2 x ER2

Weighted average

Question 7

Variance of a portfolio of two assets

Answer 7

Var (p) = w1^2 x Var (1) + w2^2 x Var (2) + 2 x w1 x w2 x Cov (1,2)

Question 8

Risk free asset

Answer 8

Rate of return fixed

Stand dev = 0

Question 9

CAPM equation

Answer 9

ER = rF + B(i,m) x (ERm - rF)

rF : risk free rate
B(i,m) : beta : Systemic rik of the asset
ERm : expected return of the market

Question 10

Market risk premium

Answer 10

ERm - rF

Question 11

Systemic risk of an asset

Answer 11

B(i,m) = Cov (i,m) / Var (m)

Question 12

Beta of a portfolio

Answer 12

B(p,m) = w1 B (1,m) + w2 B(2,m)