Week 6

Question 1

Variance

Answer 1

average squared difference between the actual return and the expected
(average) return (always a positive number)

Question 2

Standard deviation (Volatility)

Answer 2

square root of the variance (always presented as a positive number).
The larger the standard deviation the more the actual return tends to differ from the
average return.

Question 3

Portfolio weight

Answer 3

• a percentage of a portfolio’s total value that is in a particular asset

Question 4

Portfolio return

Answer 4

percentage return earned from investing in total portfolio

Question 5

Portfolio standard deviation

Answer 5

standard deviation of the returns earned from
investing in total portfolio.

Question 6

Principle of diversification

Answer 6

spreading an investment across a number of assets will
eliminate some, but not all, of the risk

Question 7

Idiosyncratic Risk

Answer 7

Risk factors affecting only that security. Also called “diversifiable risk

Question 8

Systematic Risk

Answer 8

Economy-wide sources of risk that affect the overall asset market. Also
called “market risk.”