Risk Measures

Question 1

Standard Deviation

Answer 1

Measures TOTAL RISK of an Undiversified Portfolio

Question 2

Standard Deviation calculator Keys

Answer 2

Enter #—> Sigma Key, enter next #, then sigma key again, then orange key, Sx,Sy key (is the 8 key)

Question 3

Standard Deviation Bell Curve

Answer 3

+/- 1 std dev = 68%

+/- 2 Std Dev = 95%

+/- 3 Std Dev = 99%

Question 4

Coefficient of Variation Formula

Answer 4

Used when comparing 2 assets w/ different average returns

= Std dev / Avg. expected return

The higher it is, more risky the investment and less likely to achieve the average return

Question 5

Correlation Coefficient

Answer 5

Only ranges from +1 to -1

Shows strength & direction 2 assets move relative to each other

+1 means perfectly correlated

0 means completely uncorrelated

Diversification benefits begin when it’s less than +1

Question 6

Beta

Answer 6

Measures Systematic risk (Market Risk) (Undiversifiable Risk)

Appropriate measure for a well diversified portfolio

Question 7

Coefficient of Determination or R-Squared

Answer 7

Measures how much return is due to market

Found by squaring the correlation coefficient

R-squared also tells if Beta is appropriate measure of risk

Question 8

When to use Beta or Standard Deviation based on R-Squared? (Coefficient of Determination)

Answer 8

If R^2 greater than or equal to 0.70, use BETA (Treynor)

If R^2 Less than 0.70, use Standard Deviation (Sharpe)

Question 9

Which index do you pick for an appropriate benchmark?

Answer 9

Pick the one with highest
R-Squared or correlation

Question 10

Systematic Risk

Answer 10

Undiversifiable
Market risk
Economy based risk

Question 11

Unsystematic Risk

Answer 11

Diversifiable
Unique risk
Company-specific risk

Question 12

R-Squared can be derived from what measure?

Answer 12

Can be derived from squaring the correlation