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