Risk Measurements Flashcards
Standard deviation measure of what
volatility
amount of variation or dispersion from an average
Total risk
The standard deviation of a random variable is
the square root of its variance
Standard deviation is used in what
capital allocation line, sharpe, Squared, and information ratio
Steps in calculating SDEV
calculate the arithmetic mean rate of return
Subtract the mean rate of return from each years returns
Square the differences
Add the squares of the differences and find the arithmetic average of the sums = variances
Take the square root of variance = standard deviation
N versus N-1
Population = N
Sample = N-1
Investor allocates 40 percent of his portfolio to Stock A, with an expected rate of return of 0.18 and a variance of 0.0484 and 60 percent in a T bill that pays 4 percent. His portfolio’s expected return and standard deviation are
__________ and __________,
9.6%
8.8%
Investor allocates 40 percent of his portfolio to Stock A, with an expected rate of return of 0.18 and a variance of 0.0484 and 60 percent in Stock B with an expected rate of return of 0.12 and a variance of 0.03. The correlation coefficient between Stocks A & B = 0.72. His portfolio’s expected return and standard deviation are __________ and __________,
14.40%
17.6%
Investor allocates “some” percentage of his wealth in a risky asset with an expected rate of return of 12% and a variance of 4%, and “some” percentage in T bills that pay 5%. What percentages of his money must be invested in the risk free asset and the risky asset, respectively, to form a portfolio with a standard deviation of 0.12?
60%
The monthly standard deviation of a portfolio has been calculated to be 2.17.
Convert this monthly standard deviation to annualized standard deviation.
7.5171
Variance measure
how far things are spread out
Variance value of zero means
that all values with the set are identical
Drawback of variance
gives added weight to outliers since squaring the numbers can skew interpretations
Steps for calculating variance
Calculate the arithmetic mean rate of returns
Subtract the mean rate of return from each years returns
Square the differences
Add the squares of the differences and find the arithmetic averages of the sums = variance
Covariance measures
how much two random variables move or change together
High covariances implies
not much diversification
Compute risk
Determine expected return for a portfolio, measured by SDEV
Calculate the correlation coefficient of expected returns between each pair of asset classes
Beta is used in what
CAPM
Beta is calculated by using
regression analysis
Consider the following:
State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%
Return of stock B: 8%, 7%, 6%, 9%, 8%
What is the expected rates of returns of stock A and B?
13.2%
7.7%
Consider the following:
State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%
Return of stock B: 8%, 7%, 6%, 9%, 8%
The standard deviations of stock A and B?
1.5%
1.1%
Consider the following:
State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%
Return of stock B: 8%, 7%, 6%, 9%, 8%
The variances of stocks A and B are?
2.2%
1.2%
Consider the following:
State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%
Return of stock B: 8%, 7%, 6%, 9%, 8%
The coefficient of correlation between A and B?
.46
Consider the following:
State: 1,2,3,4,5
Probability: 10%, 20%, 20%, 30%, 20%
Return of stock A: 10%, 13%, 12%, 14%, 15%
Return of stock B: 8%, 7%, 6%, 9%, 8%
If you invested 40% of your money in A and 60% in B, what would be your expected rate of return and standard deviation?
9.9%
1.1%
