Risk and Return

Question 1

Significance of: Coefficient of Variation (CV)

Answer 1

Tells us how many dollars we risk for getting $1 of return.

Question 2

Formula: Coefficient of Variation

Answer 2

Standard deviation/Arithmetic mean

Question 3

Significance of: Arithmetic mean

Answer 3

Shows us the expected returns for a given time period

Question 4

Significance of: Variance

Answer 4

Shows us the expected risk for a given time period

Question 5

Definition: Market Risk (βs)

Answer 5

The market risk is usually a value between 0-2 that tells us the relationship between the value of a stock and the current valuation of the economy (according to a stock exchange). This value is out of an investors control, which is why it is also called the undiversifiable risk. E.g. If βs = 1.5, if the DAX goes up by 1 the stock goes up by 1.5 and vice versa.

Question 6

Significance of: Correlation Coefficient (Portfolio Theory)

Answer 6

This value tells us how well we are decreasing the risk of our portfolio. For example in a portfolio with 2 stocks that have a negative correlation (values between -1 and 0), due to the fact that these two stocks do not correlate, we are diversifying our risk, because if one stock goes down the other one does not because they do not correlate (in theory).