Vol. 1 Expected Value and Variance

Question 1

expected value

Answer 1

the probability-weighted average of the possible outcomes of the random variable

Question 2

What is the expected value of BankCorp’s EPS

Answer 2

E[EPS] = 0.15($2.60)+0.45($2.45)+0.24($2.20)+0.16($.200) = $2.3405

Question 3

Variance [formula]

Answer 3

Question 4

Variance [definition]

Answer 4

the expected value (the probability-weighted average0 of squared deviations from the random variable’s expected value

Question 5

Standard deviation [definition]

Answer 5

the positive square root of variance

Question 6

Standard deviation [formula]

Answer 6

Question 7

What is the standard deviation of BankCorp’s EPS

Answer 7

Question 8

Portfolio expected return [definition]

Answer 8

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

Question 9

Portfolio expected return [calculation]

Answer 9

Question 10

Calculate the expected return

Answer 10

Question 11

covariance [calculation]

Answer 11

Question 12

three-asset portfolio variance [calculation]

Answer 12

Question 13

three-asset portfolio covariance [calculation]

Answer 13

Question 14

n-asset portfolio covariance [calculation]

Answer 14

Question 15

In an n-asset portfolio, there are ___ variance terms, and ____ off-diagonal covariance terms.

Answer 15

n ; n^2 - n

Question 16

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 _______

Answer 16

[covariance is] negative

Question 17

When the returns on the assets are unrelated, the covariance of returns is _____

Answer 17

[covariance is] 0

Question 18

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 _____

Answer 18

[covariance is] positive

Question 19

Independence for random variables [definition]

Answer 19

two random variables X and Y are independent if and only if P(X,Y) = P(X) P(Y)

Question 20

Multiplication rule for expected value [ definition]

Answer 20

The expected value of the product of uncorrelated random variables is the product of their expected values