Portfolio Management

Front 1

The measure can be standardized by dividing the covariance by the standard deviations of the two securities being tested.

Back 1

cov(1,2) = p(1,2)σ1σ2

p = coreraltion coeeficent It varies in the range of -1 to 1.

Front 2

When an asset is added to a large portfolio with many assets, the new asset affects the portfolio's standard deviation in two ways:

Back 2

1. The asset's own variance, and
2. Covariance between this asset and every other asset in the portfolio. The effect of these numerous covariances will outweight the effect of the asset's own variance. The more assets in the portfolio, the more this is true.

Front 3

Adding securities to a portfolio that are not perfectly, positively correlated with each other will reduce the standard deviation of the portfolio

Back 3

The lower (higher) the correlations between returns of assets in the portfolio, the lower (higher) the portfolio risk, and thus the higher (lower) the diversification benefits. The ultimate benefit of diversification occurs when the correlation between two assets is -1.00.

Front 4

n a two asset portfolio, the ideal scenario provides a contrast in asset returns similar to the "saw tooth" diagram shown above. Thus, one asset would completely offset the other asset (in terms of risk) providing a smooth rate of return with no variability. This, of course, could only occur if the two assets had a perfect, negative correlation.

Back 4

Standard Deviation of Portfolio = (wj2σj2 + wk2 σk2 + 2wj wk Covjk)1/2

Front 5

The expected return is a probability weighted average of the returns

Back 5

0.35 * 10% + 0.35*(-4%) + 0.3*(9%)

Front 6

The covariance between the returns equals the expected value of the product of the deviations of the individual returns from their means

Back 6

EV(RA-EA)(RB-EB)

Front 7

Efficient frontier

Back 7

1. The maximum rate of return for every given level of risk, or
2. The minimum risk for every level of return.