Week 14 - Workshop Questions Flashcards
How do you calculate the average return of a ‘Single Stock’?
Sum the returns in all years and then divide by the number of years.
How to calculate the ‘Volatility’ or ‘Standard Deviation’ of a single stock?
Enter the data into calculate and the Sx value is the standard deviation of the stock.
What is the formula for calculating the Co-Variance between two stocks?
(Actual return of stock A - Average return of stock A)’x (Actual return of B - Average return of stock B)’ /n
Each bracket is squared
What is the formula for calculating the ‘Correlation’ between two stocks?
[Covariance/ SD(a) x SD (b)]
How do you calculate the ‘Standard Deviation’ of a portfolio of 2 stocks given the percentages of which Stock A and Stock B contribute to the portfolio whole?
W1’x SD1’ + W2’x SD2’ + 2 x W1 xW2 xSD1 xSD2 xCorrelation’ (raised to 1/2)
(All raised to 1/2)
How to calculate the ‘Expected Return’ of a 3 stock portfolio given the weighting of each stock?
(W1xER1) + (W2xER2) + (W3xER3)
What does ‘Shorting a positive correlation’ lead to?
Lower risk
What is a ‘Sharpe Ratio’?
The ‘Sharpe Ratio’ measures the reward (excess return) to risk (volatility) of a portfolio.
How is the ‘Sharpe Ratio’ calculated?
Expected Return - Risk Free Rate / Volatility
When is the ‘Sharpe Ratio’ useful?
When the risk preferences of an investor is not known.
It provides an easy comparison between different investments.
How do you find the ‘Beta’ of a stock in relation to the market?
Correlation with market x Volatility of stock/ Volatility of market
What is the ‘Beta’ of a stock?
The ‘Beta’ of a stock is a measure of the relationship between a stocks volatility and the volatility of the general market.
For example,
Does a stock go up when the market goes up?
Does a stock go down when the market goes down?
Does a stock go up when the market goes down?
Does a stock go down when the market goes up?
What is the formula for calculating the ‘Expected Return’ from the Beta of a stock?
Expected return =
Risk Free Rate (RFR) + Beta (B) X (Market expected Rate - Risk Free Rate (RFR)
RFR, Market Expected Rate are given as integers!
How do you calculate the ‘Next best alternative investment’ given the current investments Volatility, the Risk Free Rate, the Market Expected return and the Market Volatility?
The calculation for the next best alternative investment is:
ER = RFR + ‘x’ (Market expected return - RFR)
The sum of this then gives the rate at which capital should be multiplied.
How do you calculate the volatility of the next best alternative investment?
SDx (Rm)
