7 Questions
What is the main purpose of the portfolio approach mentioned in the text?
To reduce the risk associated with wealth while maintaining expected returns.
How does the portfolio approach help in managing risk?
By offering lower overall volatility of returns with equivalent expected returns.
Why is the standard deviation of an equally weighted portfolio not simply the average of standard deviations of individual shares?
Because portfolio standard deviation is affected by correlations between securities.
What does the diversification ratio represent in relation to standard deviation?
The ratio of the equally weighted portfolio's standard deviation to a randomly selected security's standard deviation.
How do portfolios generally compare to individual securities in terms of expected return and volatility?
Portfolios offer equivalent expected returns and lower volatility than individual securities.
In what way does the portfolio approach differ from evaluating individual securities in isolation?
Portfolio approach analyzes securities as contributors to a basket with similar characteristics.
What key benefit does the portfolio approach provide in terms of wealth risk management?
Reducing the risk associated with wealth without decreasing expected returns.
Explore the concept of representative portfolios for a given asset class through the comparison of price-weighted and value-weighted indexes. Understand how indexes serve as indicators of overall performance and vehicles for diversification and ownership access.
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