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9 Cards in this Set
- Front
- Back
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Expected Return |
E(R) = w1R1 + w2Rq + ...+ wnRn |
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Standard Deviation ofHistoric Returns (5 steps) |
n years of historic annual returns Step 1: Calculate the mean Step 2: Subtract mean from each value Step 3: Square the number from Step 2 Step 4: Add all the squared numbers Step 5: Divide by n-1 |
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Covariance - define |
Measure of the degree to which returns on two risky assets move in tandem. |
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Expected Return for a Single Stock
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Weighted mean of expected outcomes |
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Variance for a single stock |
Squared difference from mean |
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Relationship between variance and standard deviation |
Standard deviation = square root of variance |
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Efficient Portfolio - definition |
One that maximises the rate of return for a given level of risk ' |
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Effect of Correlation - expected return, volatility |
- Correlation has no effecton the expected return of a portfolio - The lower the correlation, the lower the volatility we can obtain. As the correlation decreases, the volatility of the portfolio falls. - The curve showing the portfolios will bend to the left to a greater degree as correlation increases. |
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Capital market line |
Tangent line to the efficient frontier that passes through the risk-free rate on the expected return axis. |
