Week 7: Risk and Return - Part 2 Flashcards
1
Q
Measuring risk: coefficient of variation
A
Coefficient of variation: standardised measure of risk per unit of return.
Calculated as the standard deviation divided by the expected return.
Useful when investments differ in both risk and expected returns.
CV is the indicator to evaluate risk-return profile when investment is held individually.
2
Q
Risk and return results.
A
When both options have the same return, we prefer the lower risk.
When both companies have the same risk, we prefer the higher return.
3
Q
What risk are we measuring with standard deviation?
A
Standard deviation measures total risk.
Total risk = market risk + firm specific risk
4
Q
What is a portfolio?
A
A combination or collection of investment securities.
