Vol. 1 Expected Value and Variance Flashcards
expected value
the probability-weighted average of the possible outcomes of the random variable
What is the expected value of BankCorp’s EPS
E[EPS] = 0.15($2.60)+0.45($2.45)+0.24($2.20)+0.16($.200) = $2.3405
Variance [formula]
Variance [definition]
the expected value (the probability-weighted average0 of squared deviations from the random variable’s expected value
Standard deviation [definition]
the positive square root of variance
Standard deviation [formula]
What is the standard deviation of BankCorp’s EPS
Portfolio expected return [definition]
Given a portfolio with n securities, the expected return on te portfolio is a weighted average of the expected returns on the component securities using their respective weights
Portfolio expected return [calculation]
Calculate the expected return
covariance [calculation]
three-asset portfolio variance [calculation]
three-asset portfolio covariance [calculation]
n-asset portfolio covariance [calculation]
In an n-asset portfolio, there are ___ variance terms, and ____ off-diagonal covariance terms.
n ; n^2 - n
When the return on one asset is above its expected value, and the return on the other asset tends to be below its expected value, the covariance is _______
[covariance is] negative
When the returns on the assets are unrelated, the covariance of returns is _____
[covariance is] 0
when the returns on both assets tend to be on the same side, either above or below their expected values at the same time, the covariance is _____
[covariance is] positive
Independence for random variables [definition]
two random variables X and Y are independent if and only if P(X,Y) = P(X) P(Y)
Multiplication rule for expected value [ definition]
The expected value of the product of uncorrelated random variables is the product of their expected values
