Investments Chapter 6

B>1

High beta- more systematic market risk

CAl

Using optional risk pro folio as risky asset

correlation

tendency of assets returns to move together measured with correlation coefficient (p)

min variance portfolio does not

give you the highest possible sharp ratio

B<1

Low beta- less systematic market risk

IT market

Market increase by more that 1% average over time

Diversification Risk

Risk that can be eliminated bu diversification not systematic influences the returns of a single stock

Steepest Tangent Line

highest possible sharp ration

nondiversificable risk

inherent on stock market can't be diversificated away influence returns on the entire market

optimal risk portfolio

mix of assets with the highest possible SP (Sharp tangent)

P = 0

no diversable co- movement

P= 1

perfect correlation- basically the same stock

P= -1

perfect negative correcation - opposite direction and magnitude- over diversified and cancels out profits made

B=1

systematic risk = market risk

The higher the sharp ratio.,...

the better

Consider the following table: Stock Fund Bond Fund Scenario Probability Rate of Return Rate of Return Severe recession 0.10 −42% −9% Mild recession 0.20 −22% 15% Normal growth 0.40 27% 8% Boom 0.30 32% −5% a. Calculate the values of mean return and variance for the stock fund. (Do not round intermediate calculations. Round "Mean return" value to 1 decimal place and "Variance" to 2 decimal places.) Mean return 11.80 correct % Variance 7.33 incorrect %-Squared b. Calculate the value of the covariance between the stock and bond funds. (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Covariance -0.35 incorrect %-Squared

Consider the following table: Stock Fund Bond Fund Scenario Probability Rate of Return Rate of Return Severe recession 0.10 −42% −9% Mild recession 0.20 −22% 15% Normal growth 0.40 27% 8% Boom 0.30 32% −5% a. Calculate the values of mean return and variance for the stock fund. (Do not round intermediate calculations. Round "Mean return" value to 1 decimal place and "Variance" to 2 decimal places.) Mean return 11.80 correct % Variance 7.33 incorrect %-Squared b. Calculate the value of the covariance between the stock and bond funds. (Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Covariance -0.35 incorrect %-Squared

Using the capital asset line can create ANY level of E(r) by

combining optional risky portfolio of T-bills + retain SP Highest SP

P measures...

the direction and magnitude basically the how the same the stocks are to each other