Chap 9: Characterizing Risk and Return

What is standard deviation as it relevance?

The larger the standard deviation, the higher the risk Standard deviation = Square root of the average deviation of returns

Which statement is true?

The larger the standard deviation, the higher the total risk.

What are diversifying to Reduce Risk in real investments?

Two main components of total risk Firm-specific risk Market risk Total risk = Firm specific risk + Market risk

What do Diversification say in a investment portfolio?

When stocks' returns not are perfectly correlated price movements often counteract each other With perfect positive correlation, diversification does not affect risk

What are the Risk versus Return as it correlates to investments?

With any investment, there is a risk/return tradeoff The coefficient of variation (CoV) is a relative measure of this relationship

What are the Coefficient of variation for an investment and calculations?

C.O.V.= amount of risk divided by return or standard deviation divided by average return

What is Historical Risks and its relevance?

Computing Volatility Risk of Asset Classes Risk versus Return

What are the forming portfolios as it relates to investments?

Diversifying to reduce risk Modern Portfolio Theory Diversification Portfolio Return

What are the two computing returns?

Dollar returns Percentage returns

What are the Diversifying to Reduce Risk as it correlates to investments?

Firm-specific risk is referred to as diversifiable risk Market risk is non-diversifiable risk This risk applies across all securities in any given market

What is performance asset classes purpose and function?

Historically, stocks have outperformed bonds and cash on an average-return basis Average returns not accurate picture of annual returns

What do the dollar returns do?

Includes capital gain or loss as well as income Dollar return = Capital gain or loss + Income

Historical Returns

Method for calculating returns assessment method for investment returns posits that historical returns are helpful in predicting future returns

What is Portfolio Return and its calculation in an investment?

Return calculation Comprised of the individual returns of each security in portfolio and the relative weight of each in the portfolio R T = Proportion of portfolio in first stock * That stock's return + Second stock portion * Second stock return + .....

What do percentage returns function and purpose?

Returns across different investments are more easily compared because they are standardized Can be used for most types of investments Percentage return = Ending value - Beginning value + income divided by Beginning value times everything by 100

What does Modern Portfolio Theory say?

Risk is reduced when securities are combined Optimal portfolio is the combination of securities that produce the highest return for the amount of risk taken

This index tracks 500 companies which allows for a great deal of diversification.

S&P 500

What is computing volatility and it relevant functions?

Standard deviation (StD) measures volatility StD is the square root of the variance Represents the total risk of a security or portfolio

Name one aspect of asset classes?

Stocks are more volatile than bonds or T-bills

This is defined as the volatility of an investment, which includes firm specific risk as well as market risk.

total risk

This is a measure of risk to reward earned by an investment over a specific period of time.

coefficient of variation

This includes any capital gain (or loss) that occurred as well as any income that you received from a specific investment.

dollar return

This is defined as the portion of total risk that is attributable to firm or industry factors and can be reduced through diversification.

firm specific risk

This is the portion of total risk that is attributable to overall economic factors.

market risk

This is the concept and procedure for combining securities into a portfolio to minimize risk.

modern portfolio theory

This is the dollar return characterized as a percentage of money invested.

percentage return

This is defined as a combination of investment assets held by an investor.

portfolio